Let’s look at the facts and figures. The reality is that many indicators are pointing to a weakening economy. To read the analysis, go here.
The reason why we need to monitor this market is the following. The high yield debt market is a leading indicator for the direction of the stock market. Whenever investors leave the junk bond market, yields will spike upwards and the price of these bonds will decline in value. This will lead to less borrowing and consequently lead to less spending. What we then see is a stock market crash with typically a delay of a few months (see chart below from FRED). You can clearly see that the stock market (red chart) is overdue for a correction as the high yield bond market (blue chart) is declining in value.
Read the full analysis here.
This is why we need to keep an eye on high yield debt (blue chart). Since the second half of 2014, this high yield debt has collapsed. Soon, the stock market (red chart) will follow.
In the past few weeks we have seen a lot of changes in investor sentiment. It all started at the end of September 2014. We had a lot of bad economic news coming. A falling labor participation rate, lower PMI readings, falling consumer sentiment, lower factory orders, declining oil demand, falling home prices, lower GDP growth revisions, declining bond yields, a drop in Dow transportation index, lower Baltic Dry Indices, lower Chinese power consumption growth and more recently falling retail sales.
As a result, the Dow Jones has posted losses for 2014. What’s most interesting is that volatility has now started spiking, which is never a good sign for stocks (see chart below from Google Finance). Volatility has seen similar spikes in 2008, 2010 and 2011 which all resulted in a correction in stocks.
On the other hand, gold has been very strong this year based on a higher fear index and higher volatility. Since October 2014 we have seen an additional anomaly where oil goes down and gold goes up. I see this as a buying opportunity in the gold and silver mining sector.
Our “Correlation Economics” website has already amassed more than hundred correlations describing stock and bond valuations, gold, debt, deficits, the mortgage market, employment, GDP, etc…
In this article I’ll go over the most prominent market moving correlations to give a thorough market outlook for the coming months. This way, investors know what to expect in the future. I’ll also briefly touch my favourite correlations in the process.
Go here to see the analysis.
I think it happens soon, because when we look at Japan, the GDP estimates there are now in negative territory. Japan second quarter GDP is forecasted to drop 10% year over year. That means the Nikkei will surely plummet and don’t even think this won’t affect the U.S. markets.
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| Japan GDP |
Since the crisis of 2008, total credit market debt as a % of GDP has been going down for the first time since history. Private debt was in a debt deleveraging mode (blue graph), while the Federal Reserve’s public debt was in a debt expansion mode (red graph).
If we look at the nominal value of debt, we can see that since 2014, total, private and public debt are all growing again, resuming exponential expansion.
According to the stock valuation chart, the stock market is now crossing the 115% ratio of total market cap against GNP. Which means we are crossing the border from modestly overvalued into significantly overvalued territory.
If global GDP weakens next year, a drop in the stock market will not be far off.
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| Stock Valuation Table |
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| GDP Estimates |
Correlation Economics (Backup) 