Q1 Stock Market Outlook: We’re Gonna Need a Bigger Slide

If 2018 rings in a bear market, it could look something like the Kennedy Slide of 1962.

That was my conclusion in “Riding the Slide,” published in early September, where I showed that the Kennedy Slide was unique among bear markets of the last eighty years. It was the only bear that wasn’t obviously provoked by rising inflation, tightening monetary policy, deteriorating credit markets or, less commonly, world war or depression.

Moreover, market conditions leading up to the Slide should be familiar—they’re not too far from market conditions since Donald Trump won the 2016 presidential election. In the first year after Kennedy’s election, as in the first year after Trump’s election, inflation seemed under control, interest rates were low, credit spreads were tight, and the economy was growing. And, in both cases, the stock market was booming.

Here’s an updated look at Trump’s stock rally versus the Kennedy rally and subsequent Slide:

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As you can see, we’ve now reached the chart’s critical juncture—at this time of the calendar in 1962, the post-election rally was ending, and the Slide was about to begin. Our chart begs the question: Will the similarities continue and lead us into a Trump Slide in early 2018?

Or, with less drama, you might like to hear my Q1 stock market outlook.

Never Mind Tea Leaves, Here’s a Strong Signal from the Economic Dashboard

We’ve been seeing more and more commentaries discussing bad stuff that can happen when the Fed tightens policy and, as a result, the yield curve flattens. (See, for example, this piece from Citi Research and ZeroHedge.) No doubt, the Fed’s rate hikes will lead to mishaps as they usually do—in both markets and the economy. But most forecasters expect the economy to expand through next year, believing that the Fed and the yield curve aren’t yet restrictive enough to trigger a recession.

We won’t make a full-year 2018 forecast here, but we’ll share one of our “dashboard” charts that supports the consensus view for at least the first half of the year. With one methodological change to a chart we published in August, we’ll look at the following indicators, which together have an excellent track record predicting the business cycle:

Riding the ‘Slide’: Is This What the Next Bear Market Looks Like?

Even as the Fed’s decision makers are beginning to worry less about recession and more about bubbly stock prices, we’re not yet moved by their attempts to curb the market’s enthusiasm. After all, the fed funds rate sits barely above 1%, which not too long ago qualified as a five-decade low. And other indicators, besides interest rates, aren’t exactly predicting the next bear, either. Inflation is subdued, credit spreads are tight, banks are mostly lending freely and the economy is growing, albeit slowly. It just doesn’t feel as though we’re close to a major market peak.

Yet Another Theory of the Fed? Uggh!

The world hardly needs another theory of the Fed, especially so soon after its Jackson Hole symposium. But we have a theory, too, and who knows, ours could be as close to the bulls-eye as any of the others. Plus, our theory is easy to explain—it rests on the simple premise that decision makers worry mostly about their reputations. We’ll propose that reputational risks are the primary drivers of central bank policies, and then we’ll use that belief to predict a major policy shift.

What Financial Conditions Tell Us (Two Charts and a Prediction)

It seems every bank, including central banks, publishes a financial conditions index these days. And because financial conditions typically lead the economy, it makes sense to track them. In fact, they might contain even more information than they get credit for. They might offer the elusive “crystal ball” that foretells our economic fortunes.

Sound far-fetched? Spend a few minutes with this week’s pictures and talk, and you’ll be well equipped to judge for yourself. We start with seven of our favorite indicators, shown in the table below: