CRED sees no derailment of the current business cycle train

By ClearRock Research October 25, 2018 Insights

SEPTEMBER – CRED held sturdy at 65.0, the third consecutive month, leaning on resiliently strong business indicators and continued growth in consumer confidence.

CRED Website

Figure A. CRED “Speedometer” on a scale from 0 to 100.

The CFNAI, a gauge of overall economic activity, followed suit over the past few months, and continued its pace forward. Despite a slight dip in hard business data (New Orders, Industrial Production), driven predominantly by a month-over-month percent decline in new orders, business indicators were bolstered by a strong labor market and rising compensation costs. Relative to last month’s record growth, consumer confidence for September rose at a more modest pace. Retail sales growth cooled and housing permits backed-off a bit as it faces headwinds that include rising property prices and higher mortgage rates. All things considered, consumer confidence remains strong. Presently, nothing meaningful is signaling the potential derailment of the current business cycle train. Inflation remained stable despite a fed rate hike in September and expectations of another hike before year-end. Valuations are still elevated, effectively unchanged from the month prior, while the high yield spread narrowed slightly and the US Dollar remained flat, marking a reversal in its upward trend. Globally, Eurozone economic consensus data remained flat and China PMI dipped below 51 for the first time since February, despite the fact that they reported a pick-up in production in August.

About The ClearRock Economic Dashboard (“CRED”) – CRED is a proprietary financial tool we have built and refined over the past 10 years.  CRED is a monthly barometer designed to measure the strength of the global economy. It synthesizes twenty financial data points to produce a monthly diffusion index of economic health.  We represent the index using a “speedometer” with a scale of 0 to 100. A reading of 50 is neutral, which indicates that the economy is growing at its long-term historical average. A reading below 50, signals that the economy is slowing, which may lead to a contractionary phase in the economic cycle. Conversely, when CRED gives us a reading above 50, the economy is growing faster than its historical trend rate, and is likely expanding.

We use this tool to answer a simple question: where are we within the current business cycle? Answering this question is a core part of our investment management process and is an important factor in driving our asset allocation decisions. We believe that getting the big picture right is key for achieving long-term portfolio growth and, most important, helping our clients reach their financial goals.

It is important to note however, that CRED is only one of the many resources that helps our Investment Committee make more thoughtful decisions.  Our deep industry and investment experience, coupled with our network of external independent research sources, we believe has allowed us to build a sound, disciplined, and repeatable investment process.

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