The First Sign of Trouble for the U.S. Economy
Why we still aren't getting too bearish yet... The first sign of trouble for the U.S. economy... Housing continues to slow... More grim news out of Europe... A warning for the 'doves'...
Despite our cautious stance, we've continued to give this long bull market the 'benefit of the doubt'...
And one of the biggest reasons has to do with the economy.
In short, serious bear markets have rarely occurred outside of recessions.
To date, despite plenty of potential warning signs of a slowdown, official data show the economy remains strong... which means we can't rule out new highs in stocks before this bull market ends.
So while we've urged you to take some precautions – to hold some extra cash and gold, and to consider "hedging" with some short sales or long put options – we've also warned against selling all your stocks prematurely.
But as our colleague Dr. David 'Doc' Eifrig has noted, today's economic strength is like a 'double-edged sword'...
By most measures, things look about as good as they can get. But when things can't get any better, it's usually time to start preparing for them to get worse.
The jobs market is one of the first places trouble tends to appear. In particular, a sharp rise in initial jobless claims – the number of new folks filing for unemployment – is an early warning signal that all is not well in the economy.
Like the broad unemployment rate, initial claims have fallen for 10 straight years...
In fact, as we noted last week, they just fell to a fresh 50-year low earlier this month.
However, if the government's latest report is correct, this trend could now be reversing. As financial news network CNBC reported this morning...
The number of Americans filing applications for unemployment benefits surged to near a 1-1/2-year high last week, which could raise concerns that the labor market is slowing.
Initial claims for state unemployment benefits jumped 53,000 to a seasonally adjusted 253,000 for the week ended Jan. 26, the highest level since September 2017, the Labor Department said on Thursday. The rise was also the largest since September 2017.
Claims dropped to 200,000 in the prior week, which was the lowest level since October 1969. Economists polled by Reuters had forecast claims rising to only 215,000 in the latest week.
The following chart puts this move in perspective...
Now, it's still early...
As you can see above, a couple of similar moves over the past 10 years quickly reversed. It's possible we could see that happen again.
However, this week's rise is starting from the most extreme levels in half a century, suggesting the risk of a true reversal is much greater this time.
If this trend continues – particularly if initial claims create a "higher high" above 300,000 – we'll become much more concerned.
Meanwhile, another worrisome sign from the housing market...
Last week, the National Association of Realtors ("NAR") reported existing home sales plunged to three-year lows in December. Yesterday, the NAR warned that pending homes sales slowed even more dramatically last month...
According to the report, pending sales – which are an indicator of closings one to two months in the future – fell 2.2% last month. This represents a dramatic year-over-year decline of 9.8%. Worse, it happened despite a significant drop in mortgage rates, which tends to incentivize buyers.
Pending sales have now fallen for 12 straight months. They now sit at their lowest levels since 2013.
On a brighter note, the U.S. Department of Commerce also reported this morning that new home sales rose by 16.9% month-over-month.
However, this data was from November rather than December, as some of the government's reporting was delayed due to the shutdown. And sales were still down 7.7% year-over-year.
Stay tuned... We'll be following each of these trends closely.
We can debate the chances of a recession here in the U.S., but a trio of reports suggests it is all but certain in Europe...
This morning, the European Union's statistics agency reported that the 19-country eurozone economy grew an anemic 1.8% last year, its weakest pace in four years.
Elsewhere, the Federal Statistical Office of Germany reported that the country experienced one of its weakest holiday shopping seasons on record. Retail sales in Europe's strongest economy fell 4.3% in December. Economists had expected a drop of just 0.6%.
And perhaps most worrisome, new data show that Italy – one of the eurozone's largest yet most troubled economies – has already fallen back into recession, the first major European country to do so in six years.
Now, we know many Digest readers aren't particularly concerned about Europe's economic problems...
But you'd be wise to pay attention.
Years of European Central Bank ("ECB") stimulus has done nothing to solve the fundamental problems that triggered the euro crisis and roiled global markets in 2011-2012.
In addition, we'll remind you that Europe's current troubles are occurring despite this stimulus...
Unlike the Federal Reserve, the ECB has never even attempted to unwind these unprecedented efforts. Short-term interest rates remain below 0% today, and the ECB continues to maintain a quantitative easing program that was even bigger than the Federal Reserve's on a relative basis.
And yet, all this continued stimulus has not been able to keep the eurozone economy from slowing dramatically again.
Folks who cheered the Fed's dovish "change of heart" this week should keep that in mind.
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