Market Insights: Intermediate-term bottoming signals

Intermediate-term bottoming signals

With the U.S. not currently in a recession, and based on the models we monitor, which all currently estimate a low probability (<25%) of a recession in the near-term, we are now looking towards intermediate-term bottoming signals.  Indeed, it is rare for so many of these signals to occur at any given time as what we’ve seen of late (especially outside of a recession), with some of these indicators at historically extreme readings.  Though a detailed listing and explanation of all such indicators is outside the scope of this article, what we wish to relay is that the state of these indicators has begun to increase our confidence that we may be nearing an intermediate-term bottom.

Although we have made some minor adjustments in our Milestone discretionary managed account platform in order to compensate for the weakened relative strength in equity markets, our base case scenario remains that the U.S avoids dipping into recession in the near-term.  As such, we are beginning to look for signs that the period of correction we are currently experiencing is getting long in the tooth.  At this point, we see many positive signs from the U.S. economy, including key measures of the labor market slack continuing to tighten, relatively elevated consumer sentiment (and corresponding spending), average hourly earnings and real personal incomes.  With the latter running at a 4% growth rate, we believe it may be difficult to tip the U.S. economy into recession.  Even the negative rate of change in the manufacturing sector, the one area that is in recession, is showing some signs of improvement.  What we have seen of late is weakening confidence in global policy makers, which has compressed the market multiple and investors’ appetite for risk in general.  What we are not currently seeing is an overwhelming global financial risk, such as 2008.  

In our quarterly meetings with clients, we have been careful to suggest that we are in a bottoming process and that bottoms are made on time, rather than price.  We will likely continue to see news-driven volatility in the coming weeks, keeping investors on alert.  Therefore, we remain optimistic in the intermediate term, though the ongoing global growth concerns and declining confidence in policymakers could keep markets in a state of higher volatility for longer.  For the long-term investor, it is suitable to keep long-term objectives in line with your market exposure; thus, even with short-term risks elevated, we see reason to stay the course with this longer-term view in mind.  

While we are seeing some calls to sell into rallies similar to 2011, we currently view it as a better strategy to hold/buy into further testing of recent lows during this bottoming process, particularly based on the history of similar market environments which we have discussed in past posts.  It will take time to repair the technical damage to markets that we have witnessed, but patience should be rewarded.