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Markets at an Inflection Point: Caution Advised

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S&P 500 has rallied significantly since the beginning of 2019 and is up 17.5% for the first 4 months of the year. We have seen the market pull-back a bit this month and S&P 500 is down -4% for the month as of this writing. Even with one of the biggest rallies in the history of the market in the first quarter of this year, S&P 500 has been unable to close above its previous high and we believe that this rally is coming to an end soon.

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Here are few things that concern us.

  • Declining World Trade Volume: According to CPB World Trade Monitor data trade volume is plunging at the fastest pace in a decade. In February world trade volume decreased 1.7% month‐to‐month and world industrial production decreased 0.1% month‐to‐month.
  • Subprime Auto Loans: At the end of 2018, more than 7 million Americans were 90 days past due, on their auto loan payments, according to the Federal Reserve Bank of New York. That total represents an all-time high—and a further spike could send troubling ripples through the broader economy. This is happening at a time where the unemployment rate has been the lowest that we have ever seen.

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Source: http://fortune.com/longform/next-recession-by-the-numbers/

 

  • South Korea GDP contraction: The South Korean economy contracted by 0.3% quarter-on-quarter in the January-March period this year, according to an advance estimate released by the country’s central bank. South Korea primarily exports high value goods to other countries with technical equipment and machines being 42% of their exports in 2017. When we see high value goods’ demand contracting, it usually signals more trouble ahead.
  • Divergence between large and small caps: Although we have seen S&P 500 approach its old high Russell 2000 is still 8% below the high that was made in August 2018. Although the divergence by itself is not a valid signal, it serves as a tell of the overall health of the market. In the chart below, the last time we saw this divergence was in September/October 2018 and the S&P 500 lost about 20% from October to December 2018.

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