Will the Stock Market Rally End Soon? What the Indicators Say

Are we due for a stock market downturn? You would think so if you listened much to market prognosticators. And, perhaps ironically, it is because we are in the longest-lasting rally ever that some people are thinking pessimistically. After all, what goes up must come down, right?

Well, yes, but that doesn’t mean the downturn is likely to happen tomorrow. And if you look at some recent economic indicators, you might come away with a glass-half-full, not a half-empty, outlook.

The Rally Makes History

On Tuesday, August 22, the U.S. stock market made history with the longest-lasting bull market since we started recording markets. (A bull market is when stock prices are climbing, and a bear market is when they are falling.) The generally upward stock movement started March 9, 2009, after the S&P index bottomed out at 666. Since then—over nearly nine years—it has climbed to reach its record-breaking peak of 2,862.

We can credit two factors to this longtime bull market: the depth of the crisis that preceded it (the 2007-08 global financial meltdown) and an unprecedented stretch of near-zero interest rates (thanks to Federal Reserve policy meant to lift us out of recession).

Still, you may hear people say that we are due (or even overdue) for a stock market downturn. But consider this:

  • The stock market generally peaks six to nine months before a recession.

  • General economic growth is modestly positive.

  • U.S. stock market prices are stretched but not excessive (foreign stock prices are a better value).

  • None of a select range of stock market indicators is ringing an alarm bell.

A recent Kiplinger’s article* covered those indicators and what they are telling us.

What the Indicators Say

The Kiplinger’s article took a look at five indicators:

  1. Consumer Confidence Index. Since consumer spending drives the majority of our economy, a sharp drop in consumer confidence could mean that a recession is on the horizon. On average, recessions have occurred when the index drops to 63 or less. Where is the index now? At 127.4—not even close!

  2. The advance-decline line. This line represents the number of New York Stock Exchange stocks with share prices that are rising minus those that are falling over time. Essentially, it tells us how many stocks are participating in a trend, and right now, that line is climbing, meaning the gains are broadly based.

  3. 52-week stock highs and lows. The number of stocks hitting new 52-week highs or lows can indicate whether we are going to ride the market up or down. For 2018, each month has brought 20 to 40 new lows (except for a spike in February)—which is within the norm for a healthy market. The article does note that new highs peak one year, on average, before a market tops out. The peak for new highs was December 2016.

  4. Housing starts. Like the Consumer Confidence Index, the number of new homes being built can indicate a strong economy since people aren’t buying homes when they are out of work. As the article points out, within three months of every recession since 1960, “housing starts have logged a double-digit decline compared with the same month in the previous year. Average pre-recession drop: 25%.” In the latest index report, we have a 1.4% dip year-over-over, plus a 5.5% drop a month earlier. An indicator to watch? Yes. One to be alarmed about? We’d say no.

  5. Consumer Price Index and the federal funds rate. The Consumer Price Index measures inflation, and the federal funds rate is the interest rate by which banks lend money to each other overnight. The historical record indicates the onset of a bear market when the fed funds rate exceeds inflation by 2.7%, on average. However, right now, inflation exceeds the fed funds rate by 1 percentage point. Still, this is something to keep tabs on as the Federal Reserve increases the fed funds rate.

Summary
It is true that what goes up must come down. However, the indicators do not seem to be sending out SOS signals. Because market forecasting is impossible, you can help protect yourself regardless of a bear or bull market. Diversify, and leave the predictions to the prognosticators. 

*Ryan Ermey, “Market Signs to Watch,” Kiplinger’s, October 2018.