QQQ - Weekly Indicators: Profits Make 3-Year Low As Stocks Hit All-Time High; One Is Wrong

2024-01-20 08:00:00 ET

Summary

• Long leading indicators, recently “less negative,” have a major reversal with corporate profits (actual + estimated) for Q4 making a 3-year low.
• Short leading indicators are mixed, with positive trends in stock prices and gas prices, but negative trends in commodity prices.
• Coincident indicators remain slightly positive, with real consumer spending and low layoffs, but corporate profits are declining.
• Either corporate profits or stock prices are giving a false sign. Tracking other short leading indicators should give us the answer.

Purpose

I look at the high frequency weekly indicators because while they can be very noisy, they provide a good nowcast of the economy, and will telegraph the maintenance or change in the economy well before monthly or quarterly data is available. They are also an excellent way to "mark your beliefs to market." In general, I go in order of long leading indicators, then short leading indicators, then coincident indicators.

A note on methodology

Data is presented in a "just the facts, ma'am" format with a minimum of commentary so that bias is minimized.

Where relevant, I include 12-month highs and lows in the data in parentheses to the right. All data taken from St. Louis FRED unless otherwise linked.

A few items (e.g., Financial Conditions indexes, regional Fed indexes, stock prices, the yield curve) have their own metrics based on long-term studies of their behavior.

Where data is seasonally adjusted, generally it is scored positively if it is within the top 1/3 of that range, negative in the bottom 1/3, and neutral in between. Where it is not seasonally adjusted, and there are seasonal issues, waiting for the YoY change to change sign will lag the turning point. Thus I make use of a convention: data is scored neutral if it is less than 1/2 as positive/negative as at its 12-month extreme.

With long leading indicators, which by definition turn at least 12 months before a turning point in the economy as a whole, there is an additional rule: data is automatically negative if, during an expansion, it has not made a new peak in the past year, with the sole exception that it is scored neutral if it is moving in the right direction and is close to making a new high.

For all series where a graph is available, I have provided a link to where the relevant graph can be found.

Recap of monthly reports

December data included a 0.6% nominal increase in retail sales, which after inflation were up 0.2%. Industrial production rose slightly, but the previous two months were revised downward by more. Housing permits rose slightly, while starts declined. Total units under construction also declined slightly. Meanwhile existing home sales also declined slightly, to a near 30 year low. Consumer confidence as measured by the University of Michigan rose sharply.

Long leading indicators

Interest rates and credit spreads

Rates

• BAA corporate bond index 5.76%, up +0.15% w/w (1-yr range: 5.28-6.80)
• 10-year Treasury bonds 4.40%, up +0.35% w/w (3.30-4.93)
• Credit spread 1.36%, down -0.21% w/w (1.36-2.42) (new 12 month low)

(Graph at Moody's Seasoned Baa Corporate Bond Yield | FRED | St. Louis Fed .)

Yield curve

• 10 year minus 2 year: -0.25%, down -0.04% w/w (-1.07 - -0.17)
• 10 year minus 3 month: -1.22%, down +0.20% w/w (-1.89 - 0.21)
• 2 year minus Fed funds: -0.93%, up +0.24% w/w.

(Graph at 10-Year Treasury Constant Maturity Minus 2-Year Treasury Constant Maturity | FRED | St. Louis Fed .)

30-Year conventional mortgage rate (from Mortgage News Daily ) (graph at link)

• 6.92%, up +0.23% w/w (6.07-8.03).

With the new highs in interest rates almost 3 months ago, their rating reversed from neutral to negative. The short end of the interest rate curve has been varying between neutral and negative. This week the longer end of the yield curve reversed from neutral back to negative.

Because several long term interest rates have jumped ahead to the middle portion of their three year range, I have changed their rating to neutral. Otherwise I will wait for 4 months to pass after their most recent highs to change their sign.

Housing

Mortgage applications (from the Mortgage Bankers Association) (No report this week)

• Purchase apps up +9% to 162 (125-208) ((SA))
• Purchase apps 4 wk avg. up +3 to 150 ((SA))
• Purchase apps YoY -20% ((NSA))
• Purchase apps YoY 4 wk avg. -16.5% ((NSA))
• Refi apps up +11% w/w ((SA))
• Refi apps YoY up +10% ((SA))

*((SA)) = seasonally adjusted, ((NSA)) = not seasonally adjusted

(Graph at Our Charts )

Real Estate Loans (from the FRB )

• Down less than -0.1% w/w
• Up +3.6% YoY (3.5% - 12.1%).

(Graph at Real Estate Loans, All Commercial Banks | FRED | St. Louis Fed .)

Mortgage rates, like bond yields, recently made multi-decade new highs. Additionally, purchase mortgage applications two months ago sank to repeated new long term lows. Refinancing has turned markedly higher YoY, warranting a change of sign to positive, but that is against nearly non-existent levels one year ago.

Real estate loans turned ever more positive during 2022. This was helped by inflation in house prices. This indicator declined by 1/3rd from its peak YoY% change in August, turning neutral, and several months ago sank below 6.0%, the last housing indicator to turn negative.

Money supply

The Federal Reserve has discontinued this weekly series. Data is now only released monthly. November data was released three weeks ago:

• M1 m/m down -0.2%, YoY Real M1 down -12.7%
• M2 m/m up +0.2%, YoY Real M2 down -6.1%.

No recession has happened without a YoY real M1 negative, or YoY real M2 below +2.5%. Real M2 fell below that threshold in March 2022. Real M1 also turned negative as of May 2022.

Corporate profits (Q4 actual + estimated) from I/B/E/S via FactSet at p. 33 )

• Q4 20% actual + 80% estimated down -1.34 w/w to 52.18, down -11.4% q/q (3 year low).

FactSet estimates earnings, which are replaced by actual earnings as they are reported, and are updated weekly. The "neutral" band is +/-3%. I also average the previous two quarters together, until at least 100 companies have actually reported. This rating changed from negative to neutral to positive when Q3 profits made a new all-time high. But so far profit estimates in Q4 have declined sharply, and are now the lowest since Q1 2021!

Needless to say, this measure has reverted to negative.

Credit conditions (from the Chicago Fed ) (graph at link)

• Financial Conditions Index down -0.03 (looser) to -0.54 (-0.03 - -0.62)
• Adjusted Index (removing background economic conditions) down -.04 (looser) to -0.56 (+0.16 - -0.59)
• Leverage subindex down -0.01 (looser) to -0.51 (+1.61 - -0.51) (new 1 year low).

In these indexes, lower = better for the economy. The Chicago Fed's Adjusted Index's real break-even point is roughly -0.25. In the leverage index, a negative number is good, a positive poor. The historical breakeven point has been -0.5 for the unadjusted Index. The leverage index had improved from negative to neutral, then briefly retreated back to negative, but is positive for the past several months. The adjusted index had improved beyond its breakeven point, briefly turning positive and then oscillating between neutral and positive. This week it is positive again. The unadjusted index is now also below its neutral level.

Short leading indicators

Economic Indicators from the late Jeff Miller's "Weighing the Week Ahead"

• Miller Score (formerly "C-Score"): up +14 w/w to 242, +47 m/m (154 9/22/23 - 315 on 3/15/23)
• St. Louis Fed Financial Stress Index: down -0.1282 to -0.6798 (1.5746 3/23/23 - -.7854 7/28/23) St. Louis Fed Financial Stress Index
• BCIp from Georg Vrba: up +3.5 w/w to -1.8 as of 1/18/24 iM's Business Cycle Index (100 is max value, below 25 is recession signal averaging 20 weeks ahead).

The Miller Score is designed to look 52 weeks ahead for whether or not a recession is possible. Any score over 500 means no recession. This number fell below that threshold at the beginning of August 2021, so not only is it negative, but we are now well into the "recession eligible" time period.

The St. Louis Financial Stress index is one where a negative score is a positive for the economy, and during its limited existence, has risen above zero before a recession by less than one year. It did so in December, and then again briefly in March, but almost immediately decreased back below zero again and stayed there.

The BCIp, deteriorated sharply earlier last year below its recession-signaling threshold, but then improved sufficiently so that IM rescinded the recession signal. In the past several months, this has bone back below the 0.25 recession threshold. IM has updated its accompanying text to say that one measure is signaling a recession to begin in 13 weeks +/-6 weeks, while a second measure is not signaling recession at all.

Trade weighted US$

• Up +0.15 to 119.90 w/w, up +0.6% YoY (last week) (broad) (117.60 - 124.77) (Graph at Nominal Broad U.S. Dollar Index
• Up +0.82 to 103.27 w/w, up 1.2% YoY ( major currencies ) (graph at link) (99.58-108.80).

Ever since 2021, both measures of the US$ were well above +5% higher YoY, and so negative. Early in 2023 both turned positive. Last week, for the first time since then, the US$ as to major currencies turned slightly higher YoY, changing its rating to neutral. This week it was joined by the broad measure.

Commodity prices

Bloomberg Commodity Index

• Down -1.16 to 96.80 (97.96 12/23-118.14) (new 12 month low)
• Down -13.7% YoY (Best: +52.3%; worst -25.3%).

(Graph at BCOM | Bloomberg Commodity Index Overview | MarketWatch .)

Bloomberg Industrial metals ETF (from Bloomberg ) (graph at link)

• 134.91, down -1.07 w/w (133.34 12/8/23-154.13 1/4/23) (new 12 month low intraweek)
• Down -23.6% YoY (Best +69.0% May 7, 2022).

During the Boom of 2021, commodity prices soared, and total commodities were very positive. The total index is in the bottom 1/3rd of its 12 month range, so is negative. One month ago, industrial commodities moved back into the middle of that range, so turned neutral, but declined again two weeks ago.

Note, importantly, that because this particular decline in commodity prices may reflect increased supply rather than destruction of demand, the message of a nearly -10% YoY decline may have been very different from usual. On the other hand, the FRBNY's "Global Supply Chain Pressure Index," a monthly indicator, went just above 0 in November for the first time since January, indicating slight tightness, before declining slightly back below zero in December. I suspect this indicator is giving its "normal" reading again.

Stock prices S&P 500 (from CNBC ) (graph at link)

• Up +1.2% to 4839.81 (new record high).

Stocks made a 3 month low on October 26. Since then they have made several 3, 12, and now all-time highs. Nevertheless, since we have had both new highs and lows within the last 3 months, this indicator remains neutral, presumably for the last time at present.

Regional Fed New Orders Indexes

(*indicates report this week) (no reports this week)

• * Empire State down -38.1 to -49.4
• * Philly up +4.2 to -17.9
• Richmond down -7 to -4
• Kansas City down -8 to -8
• Dallas up +9.6 to -10.9
• Month-over-month rolling average: down -10 to -18.

The regional average is more volatile than the ISM manufacturing index, but usually correctly forecasts its month-over-month direction. Since spring 2022, these gradually declined to neutral and then negative. Recently they became "less negative," but reversed in the last several months.

Employment metrics

Initial jobless claims

• 187,000, down -16,000 w/w
• 4-week average 203.250, down -4,750 w/w.

(Graph at St. Louis FRED .)

The 4 week average had been higher by 5% or more YoY for most of this year, but not at levels which have in the past triggered a "recession warning." Since late summer things improved considerably, warranting a neutral rating. Claims for the past month have been lower than they were one year ago, warranting a rating change to positive. This past week they made 50+ year lows, save for one week in 2022.

Temporary staffing index (from the American Staffing Association ) (graph at link)

• Down -4 to 88 w/w
• Down -8.5% YoY (low 8.5%- high +0.9%) (new low).

During 2022, the comparisons at first slowly and then more sharply deteriorated, and by early this year had turned negative. After improving somewhat, in the past two months the YoY comparisons have faded again. The big weekly decline is due to seasonality, which typically shows the sharpest decline of the year at the time of the new year. It should increase sharply next week.

Tax Withholding (from the Department of the Treasury)

• $340.9 B for the last 20 reporting days this year vs. $331.1 B one year ago, +$9.8 B or +3.0% YoY.

In late 2022, withholding oscillated between neutral and positive, and was negative on a monthly basis several times. Since January of 2023, these turned back positive, and stayed very positive until November. For three weeks they turned negative, then rebounded to positive for several weeks, before turning sharply negative again in December. This week they rebounded back to positive.

Oil prices and usage (from the E.I.A. )

• Oil up +$0.97 to $73.72 w/w, down -4.3% YoY ($66.74 - $98.62)
• Gas prices down -.01 to $3.06 w/w, down -$0.25 YoY
• Usage 4-week average up +3.9% YoY.

(Graphs at This Week In Petroleum Gasoline Section - U.S. Energy Information Administration (EIA) .)

Oil prices have now changed to slightly into the bottom 1/3rd of their 3 year range, and so are positive. Gas prices are now down near the lows of their 3 year range, and so are positive. Mileage driven turned negative for 5 weeks before turning positive 2 months ago.

Note: given this measure's extreme volatility, I believe the best measure is against their 3 year average. Measuring by 1 year, both are positive.

Bank lending rates

• 5.31 Secured Overnight Financing Rate ((SOFR)), unchanged
• 5.45 LIBOR unchanged w/w (0.10130- 5.47) (graph at link).

The TED Spread has been discontinued, and LIBOR is in the process of being discontinued. At the suggestion of a reader, I am beginning to track the SOFR instead. Unfortunately, SOFR has only been in existence since 2018, so there is no track record has to how it might behave around normal recessions (vs. the pandemic). Over the past 5 years, it does appear to have matched the trend in LIBOR.

But because of its very brief track record, although I will report it I will not be including it in my list of indicators in the conclusion, at least for now.

Coincident indicators

St. Louis FRED Weekly Economic Index

• Down -0.80 to 2.14 w/w (Low 0.90 March 14, 2023 - high 2.94 Jan. 11, 2024).

This measure remained in a neutral range during most of 2023 before breaking above 2.0, changing its rating to positive, off and on since September. Two weeks ago it had its highest reading in several years.

Restaurant reservations YoY (from Open Table) OpenTable | Site Maintenance (no report this week)

• January 10 seven day average -12% YoY (new 12 month low).

I have been measuring its 7 day average to avoid daily whipsaws.

Open Table's data since early April has generally shown a YoY% decline in the range from -2% to -7%. There was a very big surge in the two weeks before and after Christmas, before its equally big decline this week. This may be a quirk of seasonality, or it could be due to the big increase in COVID and other illnesses during the past month.

Consumer spending

• Johnson Redbook up +5.0% YoY, 4 week average +5.1% (high 10.1% in December 2022; low -0.4% July 13, 2023) United States Redbook Index .

The Redbook index gradually deteriorated from extremely positive in early 2022 to neutral by the end of the year, to negative by this summer, before rebounding in the past few months. After a very good October and early November, comparisons faded somewhat during December, before rebounding again in the weeks after Christmas. The link above goes to a 5 year graph to best show the comparison.

Consumer inflation by Truflation ( Independent, economic & financial data in real time on-chain ).

• Up +0.04% to +2.23% YoY (High 6.40% 1/27/23 - Low 2.11% 7/14/23).

This recent addition is a daily update to inflation, similar to the "billion prices project" of the last decade (which required a subscription). I have not added this to my list below of coincident or leading indicators, but needless to say it is an up-to-the-moment reading on this very important indicator.

Real Consumer Spending

• Up +2.8% YoY (12 month high 2.9% 1/5/24; 12 month low -1.4% March and May 2023).

This metric premiered earlier this month. One of my most important mantras is that consumption leads employment. Real retail sales have a long history of doing so, but are only reported on a monthly basis.

The weekly result is derived simply by subtracting YoY inflation as measured by Truflation by the YoY change in nominal consumer spending as measured by Redbook. While it will be somewhat noisy, it should anticipate changes in the monthly measures ahead of time. It continued just below its 12 month high this week.

Transport

Railroads (from the AAR)

• Carloads down -10.2% YoY
• Intermodal units up +1.9% YoY
• Total loads down -4.1% YoY.

(Graph at Railfax Report - North American Rail Freight Traffic Carloading Report .)

Shipping transport

• Harpex up +35 to 945 (810- 4586)
• Baltic Dry Index down -197 to 1357 (530-2937) (graph at link).

Rail data has been very volatile this year, with lots of volatility from positive to negative and back again. This week it was mixed again.

Harpex backed off all the way to new lows earlier in 2023. BDI traced a similar trajectory, rebounding sharply early in 2023 and then retreating just as sharply, and remains negative - until four weeks ago, when it increased suddenly to a 1 year+ high, before declining just as abruptly. Its rating has changed back to neutral.

I am wary of reading too much into price indexes like this, since they are heavily influenced by supply (as in, a huge overbuilding of ships in the last decade) as well as demand.

Steel production ( American Iron and Steel Institute )

• Down -0.5% w/w
• Up +0.1% YoY (worst -10.0% Dec 2, 2022).

In spring 2022, this metric turned negative, but the YoY comparisons gradually improved. It generally and gradually improved in 2023, and has been positive now for a number of months. This week's reading is the weakest in close to a year, and enough to change it back to neutral.

Summary & conclusion

Below are this week's spreadsheets of the long leading, short leading, and coincident readings. Check marks indicate the present reading. If there has been a change this week, the prior reading is marked with an X:

The long leading indicators recently began to improve. But corporate profits as estimated and reported for the 4th quarter of 2023 are just above their low of 3 years ago in Q1 2021. The long-term historical record says that corporate profits typically lead stock prices, averaged quarterly, which brings us to …

Among short leading measures, stock prices made an all-time high this week. One of the two - estimated + reported corporate profits, or stock prices - is giving a seriously false signal. Gas and oil prices continue to be important positives. If the supply chain has been fully un-kinked, then the continuing decline in commodity prices also signals significant weakness. Contrarily, real consumer spending continued very positive, and layoffs are close to 50+ year lows.

Coincident indicators continue slightly positive. Significantly, the sharp YoY decline in tax withholding has ended.

My suspicion is that corporate profits are giving a true signal, and stocks have gotten ahead of themselves, anticipating Fed rate cuts and a "soft landing." The other short leading indicators assume added importance in this scenario.

For further details see:

Weekly Indicators: Profits Make 3-Year Low As Stocks Hit All-Time High; One Is Wrong