Allegiant's Economic Dashboard

Every investor, whether professional or amateur, should have a basic investment philosophy they hold true to. This philosophy is the backbone of their investment strategy. At Allegiant, our philosophy hews to our main investment motto, that simpler is often better. This is especially true when it comes to the daily news cycle. Rarely do we put much weight on the endless feed of quotidian news stories, and instead we focus more on the longer-term big picture changes impacting our economy and investments. 

To this end, we spend a lot of time dissecting economic data to determine the true health of the global economy. Our Monthly Insights book is testament to this. With over 100 different charts on the economy and markets, 15 minutes of flipping through the pages provides tremendous insight into the current economic picture. However, I also understand it is a lot of information to digest, and probably more information than our clients may want to read. Therefore, and to stay true to our motto that simpler is often better, I’m happy to introduce a new research piece - the Allegiant Private Advisors Economic Dashboard. 

The Economic Dashboard consists of the six most critical charts we examine to determine the health of the economy. To make it even easier, we’ll be putting green, yellow, and red indicators (in the form of our company’s dragon mascot, Alle) on each letting you know if the data is positive, flashing a warning signal, or negative. Historically, when three of the six indicators turn negative it has been a strong signal of an approaching economic slowdown. We believe the Economic Dashboard will help clients sift through the daily headlines and quickly focus instead on what truly matters, the strength of the underlying economy.

Every month we will include the Economic Dashboard with my commentary. Some months I may highlight the changes and some months I may not write about it at all. However, since this is the first month including the Dashboard, I will go through each chart explaining why it is important and how the data currently looks. 

Job Openings

Suffice it to say, one of the most important economic releases of the month is the jobs report. More jobs equal more economic growth. However, the monthly jobs report only tells us what has happened, not what is about to happen. To get a better understanding of potential job growth going forward we look at the job openings data. Typically changes in the number of job openings precede changes in hiring statistics, which precede changes in economic growth. Right now, the U.S. is near an all-time high level of available job openings, meaning the employment environment looks strong. Takeaway: Positive Indicator 

ISM Service

The service sector accounts for nearly 85 percent of the U.S. economy. Every month the Institute for Supply Management (ISM) conducts a survey of non-manufacturing businesses on topics ranging from business activity, inventory levels, new orders, prices, etc. It is one of the best gauges on economic conditions within the service sector. Readings above 50 signify expansion, while readings below 50 signify contraction. Although down from the previous month, April’s reading of 56.8 is well in expansionary mode. Takeaway: Positive Indicator

Leading Economic Index

Sometimes I’d like to think we are the only talented group deciphering economic data for signs of change, but this clearly isn’t true. The Conference Board, an independent research association, compiles a monthly Leading Economic Index (LEI), which tends to lead (hence the name) changes in economic activity. LEI is a composite index of 10 economic components ranging from weekly hours worked, new orders, money supply, consumer sentiment, etc. In reality, it is many of the economic factors that we look at compiled into one index. A positive LEI reading is encouraging for economic activity in the months to come, while a negative reading means a recession could be around the corner. Recent LEI data suggests there is little to worry about in the months ahead. ?Takeaway: Positive Indicator

Year-Over-Year Change in Consumer Confidence

Consumption accounts for nearly two-thirds of U.S. economic activity, and the strongest predictor of future consumption is how confident consumers are about the economy. Therefore, any changes to consumer confidence are vitally important to the future health of the U.S. economy. Headlines usually focus on the absolute level of consumer confidence, but we look at the data in a more insightful way - the year-over-year change in consumer confidence. We believe examining the data this way tells us more about the future impact on the economy. As an example, a low absolute reading with a high year-over-year change is very encouraging, while a high absolute reading with a low (or negative) year-over-year change is very concerning. Our critical warning level is a year-over-year decline of 20 percent or more. In the past that has been the level most associated with impending recessions. Although the rate of change has slowed recently, consumer confidence is still positive over the past year. Takeaway: Positive Indicator

10-Year/3-Month Treasury Spread

Possibly the most important indicator is the spread between short-term and long-term interest rates. Under normal economic conditions long-term rates are higher than short-term rates. This makes sense given that the longer one borrows for the more risk the lender takes, and therefore the higher the interest rate should be to compensate for that extra risk. Every so often we experience an inverted yield curve, when short-term rates are higher than long-term rates. Inverted yield curves are great early indicators of impending recessions. While the interest rate spread has narrowed, the U.S. still has a positive spread. Takeaway: Positive Indicator

S&P 500 & 20-Month Moving Average

Finally, while most of the indicators are related to the economy, the final indicator is based on changes in equity markets. Many traders look at shorter-term technical factors like the 50-day and 200-day moving averages (the average price of the market over a set number of days). We look much longer term and use the 20-month moving average to gauge market sentiment. The market falling below its 20-month moving average has usually led to much deeper (and longer) market declines typically only associated with economic recessions. Even with recent market volatility the S&P 500 sits well above its 20-month moving average. Takeaway: Positive Indicator

While the daily headlines would lead you to believe there is much to worry about, the big picture economic data looks pretty good, and therefore all six of our important economic indicators are currently positive. There are signs that some of the economic data could be peaking and warning signs could flash later this year, but a recession does not appear imminent. Of course, keep in mind over short time periods the markets often move for their own reasons, independent of economic data. Therefore, it would not alarm or even surprise us to see a market decline – as long as it’s unrelated to any underlying economic weakness, which would show up in our data. As we move forward, you can now get an easy look at that data, too, and we can have more intelligent conversations about the risks and opportunities in your portfolio. I hope you enjoy the new Dashboard.

If you would like to see more data and charts about the economy and various financial markets, please see our Monthly Insights book, published online at AllegiantPA.com. 

Benjamin W. Jones, CFP?, AIF?

CERTIFIED FINANCIAL PLANNER?

Chief Investment Officer, Principal

Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. Past performance in no guarantee of future results. All indices are unmanaged and investors cannot actually invest directly into an index. Unlike investments, indices do not incur management fees, charges, or expenses. The Dow Jones Industrial Average is a price weighted average of 30 actively traded blue-chip stocks. The S&P 500 Index is a broad-based measurement of changes in stock market conditions based on the average performance of 500 widely held common stocks. The Russell 3000 is a market capitalization weighted equity index encompassing the 3,000 largest U.S. stocks. The MSCI EAFE Index is a float-adjusted market capitalization index designed to measure developed market equity performance, excluding the U.S. and Canada. The Emerging Markets Index is a float-adjusted market capitalization index that consists of indices of 21 emerging economies. The CBOE Volatility Index is a key measure of market expectations of near-term volatility conveyed by S&P 500 stock index option prices. The Shanghai Composite Index is a stock market index of all stocks (A shares and B shares) that are traded at the Shanghai Stock Exchange. The ISM Manufacturing Index is based on surveys of more than 300 manufacturing firms by the Institute of Supply Management. The Non-Manufacturing ISM Report on Business is a purchasing survey of the United States service economy, published by the Institute for Supply Management. Investments involve risk including possible loss of principal amount invested.