
Different leading indicators suggest significant US economic slowdown
The Peninsula
Doha, Qatar: Uncertainty has been high in recent months on the back of the new US administration, which has been rapidly enacting an aggressive polic...
Doha, Qatar: Uncertainty has been high in recent months on the back of the new US administration, which has been rapidly enacting an aggressive “policy change agenda” with deep potential implications for both consumers and investors, QNB said in its economic commentary.
Even in more ordinary periods, when governments adopt a more “business as usual” approach, it is notoriously difficult to read too much into the tea leaves of US policymaking. Currently, under a more “revisionist” Trump government, it is particularly challenging to conduct a more comprehensive analysis of economic policies and their impact on growth and inflation. Hence, we turn to markets to analyse what the evolution and direction of key asset classes is telling us about the US economy.
Financial markets provide critical insights into the overall health of the US economy over the short- and medium-term, given that they are a reflection of real world investment decisions by well-informed agents that are constantly trying to access or discount the future.
In our view, price action across asset classes seems to sustain a deteriorating macro view of slowing growth, despite any potential optimism with tax cuts or de-regulation. Three factors support this position.
First, equity prices are clearly pointing to a sharp reversal of sentiment from bullishness to bearishness amid significant risks for earnings growth prospects. The two main US equity indices, the S&P 500 and the Nasdaq 100, are down materially from their recent peaks. Importantly, a deeper look “inside of the equity market,” comparing performance across sectors and factors, suggests that capital is moving towards a more defensive position, preferring value to growth and utilities over cyclicals. In fact, cyclical equities or stocks that are more sensitive to changes in the real economy are pointing to a much more challenging environment. These cyclical stocks, including small-caps (Russell 2000) and transportation players (airlines, trucking, marine transportation, railroad and delivery companies), whose performance tend to lead economic activity, are not only underperforming vis-à-vis the major indices but are well within “bear market” territory, i.e., more than 20% decline from recent highs. Cyclical bear markets tend to be associated with periods of protracted economic weakness or recessions.