Employment was center-stage last week with the unemployment rate ticking up slightly to 4.1%. More surprising, however, was the mediocre job creation number of 151,000. Total job creation has been on a steady decline through last year into this one, and that is an ongoing concern. We also saw consumer credit increase in January by $18 billion — about $4 billion more than expected.
This week is an important data week, with job opening figures and the all-important inflation figure for February. Of course, all of this could easily move markets, especially the inflation figure. Fed chair Powell mentioned last week that the Fed does not need to be in a hurry to cut rates. Markets were predictably dissapointed. A higher-than-expected inflation print would easily push prices lower as investors adjust their rate-cut expectations.
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Overall, I am reinforcing my view that the economy is likely to see a recession soon, especially with the trade war gaining steam. The upward momentum in markets has stalled and, after last week’s price breakdown, perhaps begun trending downward. This week’s chart illustrates that we are likely moving into a recessionary market environment, defined by downward momentum and deteriorating economic data. I am again urging caution and possible risk controls for investors who need them. Understanding your downside risk tolerance is a layer of analysis we do here at Directional — we’d love to talk with you.
Chart of the Week
Each market environment has its own defining characteristics. In an expansion, we see strong market momentum and strengthening economic fundamentals. However, as the economic cycle comes to an end we see a long, slow deterioration of economic fundamentals, but market momentum remains strong. In a recession, market momentum finally gives way and turns downward. As the economy heals, the economic data improves, but momentum tends to lag behind.
As the chart shows, we have moved closer to the “recession” quadrant over the last month or so, largely driven by the deterioration of market momentum. Last week’s break below the key 5800 level by the S&P 500 was a bearish signal as it saw the reversal of the strong upward push we had seen over the last 18 months.
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