Key Charts to Watch June 12, 2019 By: Matt Sapir Ristuccia Chief Investment Officer June 12, 2019

Key Charts to Watch This blog reviews some of the key charts to watch as we head into the second half of 2019. The near-term direction of a lot of this data will depend on the resolution of the various trade disputes and economic policy. Click here to read our recent blog posts on these key issues, and/or contact us for a copy of our comprehensive Market View. For now, our conclusion is that near-term risks outweigh near-term opportunities and we remain in a short-term bear market, so caution makes sense. However, analyzing the history of bull and bear markets in conjunction with a birds-eye view of the economic cycle and current environment implies we are still in a long-term bull market that could last another 10 years.

Leading Economic Indicators LEIs (Leading Economic Indicators), which tend to go below zero 6-to-12 months prior to recession continue to trend towards zero.

Purchasing Managers Index PMI (purchasing managers index) trends remain negative. PMI below 50 indicates economic contraction. The PMI, or purchasing managers index, is a leading indicator based on a survey of managers in various industries about their purchase plans. This is a highly respected economic indicator due to its historical accuracy in predicting the direction of the economy.

Unemployment Unemployment remains low, but how much better can it get? Recent report of only 75k jobs added versus 175k expected indicates a potential slowdown in the job market. However, one report does not make a trend. Overall jobs market remains strong.

Inflation Economic indicators are trending negatively, and inflation is below Fed Targets. Therefore, it is not surprising the Fed may lower rates.

The Federal Reserve (The Fed) Negative trend of economic indicators and low inflation has increased the odds Fed will lower rates over the next year to help support economic growth. The Yield Curve is signaling this. Market is predicting high odds The Fed Funds Target Rate will be lowered at least twice 12/11/2019!

Market as a Forward Indicator Resilience implies the market is pricing in trade talks not likely to escalate, and economy will bottom and recover. Any indication that the above may not happen can cause market volatility. Market recovered when Fed indicated it would not raise rates in 2019, trade war tensions decreased. Trade war rhetoric caused volatility as escalation odds increased. Market quickly recovered to price back in conciliatory talks along with increased odds The Fed would lower rates multiple times in 2019. Market dropped when Fed increased rates, trade war tensions increased, economic data started to trend negatively.

Earnings Fed lowering rates to fight slowdown implies earnings estimates might be too optimistic still despite being revised down over the past year. Chart left shows earnings estimates for 2019. Blue is estimate as of 5/31/2018, red is estimates as of 11/30/2018, and green is estimate as of 5/31/2019. Estimates based on average of sell-side analysts bottom up stock analysis. Source: Ned Davis Research

Valuation Despite 9% predicted earnings growth, (Price/Earnings)/Growth (PEG) metrics are on the high side. ACWI = All Cap World Index.

History of Bull Markets Despite near-term risks, we remain in a long-term bull market. They tend to last 20 years.

History of Bear Markets Historically, we don’t see corrections over 20% without some combination of an aggressive Fed, Excess valuations/financial bubbles, or a commodity/supply side shock. We view all the above as unlikely. Source: JP Morgan

History of Expansions Close to longest, but slowest, expansion in history. The long and slow expansion helps explain why after 10 years we are NOT seeing excess valuations/bubbles, or an aggressive Fed. The fear of 2008 remains a “wall of worry” for many investors, supporting the secular bull market. Healthy fear keeps bubbles from forming.

Demographic Trends Demographic trends support the long-term bull market thesis. Demographic trends are only starting to turn bullish for the economy. Notice favorable and unfavorable demographics was coincident with last long-term bull (1980-2000) and bear (2000-2009). See blog on these trends. www.argentwm.com/blog-2 Bull Markets = Bear Markets = Source: Ned Davis Research, FactSet.