In Wake of Recent Turmoil, Here's What Our Indicators Say About the Future ...

No two ways about it: We’re finally seeing some market turmoil! Concerns over North Korea and bearish comments from some widely followed Wall Street experts combined to smack stocks and boost volatility in recent days.

But in the wake of that turmoil, what are our impartial, data-driven indicators saying about the future? Is this the start of the “Summer Swoon” I worried openly about last week? Or is it something more benign?

I think it’s worth taking a look at things through a broader lens, the kind provided by our proprietary Weiss Ratings Market Barometer. It can help us see if there are any worrisome divergences, such as a weakening economy coupled with a market that’s ignoring it. Or it can help point to signs of market distress that could tilt the scales in favor of the bears.

With that preamble out of the way, here’s what the Barometer looks like now:

As a refresher on how the Barometer works: We track 23 different financial, credit, and economic indicators. If an indicator makes a move that’s notably higher or lower than its longer-term average change, we note it with an “up” or “down” arrow. This tells you at a glance whether each indicator is trending in a positive or negative direction.

As you know, volatility is higher now. So the two red arrows for that indicator are negative, or cautionary, signs Economically speaking, however, we’re seeing positive news on unemployment, industrial production, GDP, and housing. The only notable negatives are short-term in nature with the ISM indexes.

When it comes to credit markets, we’re seeing relative stability in the high yield, or “junk”, bond arena. But there are some notable developments with the yield curve.

Look at the chart below. It shows how the slope of the yield curve has changed this year. We’re seeing a stronger bid in long-term bonds compared to short-dated variants, something that is causing the difference between long-term yields and short-term yields to shrink. That’s can signal increasing worries about a slowdown, or even a recession.

For now, it’s just something to watch. There are many other possible reasons for a flattening curve after all: Low inflation expectations, foreign bond buying, uneasiness about frothy market levels, etc.

Plus, our own yield curve research suggests that recession odds are still running at only 35% for the next four quarters. If we get to 75%, that’s when it’s time to really worry and when I will let you know to batten down the hatches. We’re simply not there yet, and we may not get there for a long while.

So yes, we’re seeing a bit more volatility. But it’s not that out of the ordinary historically speaking. In fact, last week before the market started its swoon, I pointed to the potential for some downside given high complacency, high valuations, and seasonal weakness.

Now that we’re getting a taste of that, I want to also point out that our Barometer is still showing overall benign conditions. We’re not running too hot, and we’re not running too cold. That puts us in a Goldilocks environment, and tells me this recent activity is just normal, par for the course type stuff.

So I recommend you use our Ratings model to pick strong names that have been thrown out unjustly. Then be ready to pounce with new buys when pricing just gets too tempting to resist!

Best,

Mandeep

Small Cap Edition, By Mandeep Rai, Senior Analyst Mandeep Rai has more than 15 years of investing experience, working as both a stock and credit analyst. At Weiss Ratings, he researches and evaluates financial and economic themes, and makes decisions on when to buy or sell specific shares for the Top Stocks Under $10 portfolio.