The US economy grew at only a 1% rate in the first half of 2016. This continues to lag US Federal Reserve and most economists projections which have been woefully optimistic.
One of the indicators that we use to monitor the stage of the economic cycle is the gage of current unemployment relative to its 3 year (36 month) moving average:
Historically when these two sets of data converge it signals the beginning of a recession. In April the Unemployment Rate stood at 5% and the 3 year moving average stood at 6%.
Currently the Unemployment Rate for June stands at 4.9% and the 3 year moving average is at 5.8%. With the moving average declining at a rate of about .1-.2% per month, it will be a matter of a few months before it is at 5%. so if the unemployment rate begins to move higher, at or above 5%, over the next few months... recession becomes a very real issue.
On Friday we will see the latest (July) US employment data and we will be watching the unemployment number closely.
As we mentioned in our webinar on Tuesday: recessions, historically are not good for the stock market:
So we do not necessarily think that it will be the different this time, with stocks over-valued by many different metrics:
(see Paul's recent blog for more detail on this topic...http://www.highrockcapital.ca/pauls-blog.html )
Perhaps the dividend paid on some stocks is, at the moment, currently better than the yield on most bonds, but if those dividend paying stocks correct just 10%, then that will wipe out 3 or 4 years of dividends, so one must be careful of that particular argument (to justify buying stocks at these levels) as well.
Feedback, thoughts, questions, concerns...
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Scott Tomenson,CIM Managing Partner, Chief Investment Strategist