Yep, that’s right – despite record high stock prices and reports that the economy is accelerating the truth is the economy stagnated in January. The latest release of the Chicago Fed National Activity Index (CFNAI) indicated a decline in economic activity led by industrial production.
The 3-month moving average of the CFNAI was -0.3, down from -0.2 in December. A reading near zero indicates that the US economy is growing at trend – which appears to be near 2% over the last few years. While this is not a disaster it does indicate a deceleration in the economy. BK has developed a GDP forecast from the CFNAI which still is indicating GDP growth above 2.7% over the next 4 quarters.
This forecast is broadly consistent with the 10 year yield at 2.4% and the Atlanta FED GDP now which is indicating 2.4% growth. The problem for stock market investors is that the consensus estimate for S&P 500 eps growth from 2017-2018 is +12% – it is going to be very difficult to achieve 12% eps growth in an economy that is only growing at 2.4-2.7%.
The bottom line: now is the time to be cautious and taking profits rather than initiating new positions.