The stock market used to be a good leading indicator for the economy. But that was before the central banks decided to manipulate it for their own purposes. As then US Federal Reserve Chairman boasted 3 years ago on launching their second round of money-printing:
“Policies have contributed to a stronger stock market just as they did in March 2009, when we did the last iteration of this. The S&P 500 is up 20%-plus and the Russell 2000, which is about small cap stocks, is up 30%-plus.”
Of course, the Fed launched their QE low-cost money policy with the best of intentions. They genuinely thought that a higher stock market would boost consumer spending by creating a new ‘wealth effect’, and that this would then encourage companies to invest in new capacity, thus boosting employment.
Unfortunately, the data shows that fewer Americans own stocks than own houses – only 52% versus 65%. So the impact of higher stock prices hasn’t actually helped to boost spending, particularly as real household incomes remain well below pre-Crisis levels.
Instead we have seen a growing divergence between the performance of the stock market and the wider economy – the opposite of the Fed’s intention.
So the question now is very simple. Will the economy suddenly start to respond to the Fed’s policy? That, of course, would be very welcome, if it happened. Or will the Great Unwinding now underway in oil and currency markets start to impact equity markets as well?
Worryingly, the IeC Boom/Gloom Index is giving us its own answer – and it is not positive. As the chart above shows:
- The S&P 500 Index has hit a record 2000 level for the first time (red line)
- But the Boom/Gloom Index of sentiment actually fell sharply (blue column)
- It is now bordering levels which have always seen stock market losses in the past
The chemical industry is also, of course, also a good leading indicator. It tends to pick up around 6 months before the wider economy, and to turn down in advance as well. And its Q2 downturn was a clear signal that H2 would be more difficult that expected.
Now the the Boom/Gloom Index is reinforcing that message. Both indicators may be wrong, and the stock market right. But the blog certainly wouldn’t plan ahead on that basis, if it was still running a major chemical business today.