The Future Looks Bright (and the Proof is in This Ratings Gauge)

I’ve maintained that things look good for the markets, in part because of the new administration’s policies. But we’ve also seen some recent stock market volatility, and it’s easy to worry when that happens.

So should you pull the plug on your investments? I don’t think so – and the proof is in a unique Weiss Ratings gauge my team and I came up with.

You see, we at Ratings understand that although markets generally trend higher over time, there can be large, occasional drawdowns, especially when we’re on the cusp of (or in) a recession. But if we’re standing on solid ground economically, and a recession is NOT in the cards, the chance of a significant drawdown diminishes.

That’s why fellow veteran analyst, Mike Larson, and I came up with a way to gauge whether the economy is healthy. Specifically, we produced a broad-based “Barometer” that takes into account 23 separate indicators from the Financial Market, Credit Market, and Economic Data universes. It looks like this …

Some of the indicators in our barometer are lagging or coincident ones. But they can help contextualize those that are more forward-looking. For instance, if GDP fell, but the ISM New Orders index and consumer confidence turned up, that would point to a bottoming out of the economy, and therefore a potential buying opportunity.

As of our latest run, nearly all of the factors are higher. Financial markets are higher, credit spreads are improving, Leading Economic Indicators are positive, and retail sales are strong. Don’t correlate department store weakness you might hear about in the news with consumer weakness. It’s more due to the paradigm shift from bricks-and-mortar shopping to online. Forward-looking indicators that came out last week, including the ISM, are also pointing to growth coming around the corner.

The only exceptions to the positive data trend were the AAII Investor Sentiment Ratio, which turned slightly bearish, and the uptick in the unemployment rate. But in this case, that was actually a net positive. Because of quirks in how the government crunches the numbers, the unemployment rate rose because more workers entered the labor force, not because a ton of workers got laid off.

So there you have it: Further evidence that we need to keep our shopping list of stocks close. This looks like just a run of the mill pull back so far, since the markets are structurally still on strong footing. That bodes well for the smaller capitalization stocks I focus on.

Best wishes,

Mandeep

Small Cap Edition, By Mandeep Rai, Senior Analyst Mandeep Rai has more than 15 years of investing experience, working as both a stock and credit analyst. At Weiss Ratings, he researches and evaluates financial and economic themes, and makes decisions on when to buy or sell specific shares for the Top Stocks Under $10 portfolio.