March 2019 Monthly Outlook – Conflicting Signals, Part Deux

Two big news items from Directional Wealth Management.

  1. Christian and his wife Maecy had a baby boy – Skyler on February 27th.  Mom and baby are doing great.  Please join me in welcoming Sklyer to the Directional Wealth family.
  2. Richard passed his Series 66 exam. He is now a fully licensed financial advisor and capable of assisting me in managing your portfolio.  Please join me in congratulating Richard.


In our February 2019 Monthy Outlook, we highlighted the conflicting signals we are seeing, both in the economy and the financial markets.  Well, February did nothing to clear things up.

Hence, conflicting signals, part deux.

Part of the problem was the delay in economic reports caused by the government shutdown in January 2019.  4th quarter 2018 GDP (gross domestic product) was just released on February 28.  GDP growth was 2.6% in the 4th quarter, down from 3.4% in 3Q 2018.  While a decline was expected, the item that caught my attention was the decline in consumer spending to 2.8% from 3.5% the prior quarter.  The consumer really fuels the US economy (accounting for ~67% of GDP), so this decline is concerning.  It may have been caused by the volatility in the financial markets in the 4th quarter last year.  This is likely reflected in the recovery in the Conference Board’s Consumer Confidence Index which bounced up in February after a sharp decline in December 2018 and January 2019.

As you can see from the chart below, recessions generally don’t occur while consumer confidence is high and rising.  However, recessions generally do start shortly after a sharp rollover of consumer confidence from a previous high level (see 2001, 2009).  Similarly, leading economic indicators (LEI) are a reasonably good predictor of changes in the economy.  Here again, recessions tend to follow shortly (usually within 18 months) of a rollover of LEI from a previous high.  Like consumer confidence, LEI started to rollover in December 2018 and January 2019.  Due to the government shutdown, February hasn’t been released yet.  I’m watching to see if LEI rebounds like consumer confidence did.  My outlook is that US GDP remains positive but the growth rate slows in 2019, with a low probability of recession this year.

Source: Advisor Perspectives                                                                                                                                      source: Yardeni Research


In February, the equity markets continued to recover from the brutal selloff in 4Q18, while volatility has declined to levels not seen since early in 2018.  While no one likes the wild swings the market sometimes goes through, too little volatility is a sign of complacency by investors, which often is an indicator that the equity market is about to hit a rough patch. In the chart below, notice the level of the VIX (S&P 500 volatility index) in January and October 2018, right before major selloffs. Another way to look at this is through the eyes of the investor.  The stock market is primarily driven by two emotions, Greed and Fear.  Ironically, this too is a “contra” indicator.  The greedier investors get, the more likely the stock market is about to turn down. Notice the spike in level of greed in early 2018 and again towards the end of the year, and where it is now.  Warren Buffett’s approach  to investing is  “be fearful when people are greedy, and greedy when people are fearful”.  These are indicators I am watching closely right now.

Source: YCharts                                                                                                                                      Source:


On the positive side for equities, corporate profits remain strong.  However,  similar to the economic data, corporate profits are showing signs of slower growth going forward.   “To date, 96% of the companies in the S&P 500 have reported actual results for Q4 2018. In terms of earnings, the percentage of companies reporting actual EPS above estimates (69%) is below the five-year average. In aggregate, companies are reporting earnings that are 3.3% above the estimates, which is also below the five-year average. In terms of revenues, the percentage of companies reporting actual revenues above estimates (61%) is slightly above the five-year average.   The blended (combines actual results for companies that have reported and estimated results for companies that have yet to report), year-over-year earnings growth rate for the fourth quarter is 13.1%. If 13.1% is the actual growth rate for the quarter, it will mark the first time the index has not reported earnings growth above 20% since Q4 2017. However, it will also mark the fifth straight quarter of double-digit earnings growth for the index. All 11 sectors are reporting year-over-year earnings growth”.   Source: FactSet

Double digit earnings growth is quite solid.  But the stock market is forward looking and will not react well to a declining rate of profit growth going forward.

March will see US/China trade negotiations, the UK perhaps exiting the EU, the Congress needing to raise the debt ceiling (although this can be put off until sometime this summer) and the newest geo-political risk of hostilities between Pakistan and India, the first armed conflict between 2 nuclear states since the end of the Cold War.

Given the conflicting signals-part deux our outlook remains cautious. We continue to monitor our indicators and will adjust accordingly.

I hope this report proves informative.


We have added a new tool to help those nearing or just beginning retirement to explore their readiness for retirement.  It’s an easy interactive tool.  Please share it with family, friends and colleagues.



March Calendar of Events   (comments and additions for future months are always welcome)

March is Women’s History Month.  Please says thanks to all the important women in your life.

March 5th                   Mardi Gras

March 8th                   International Women’s Day

March 10th                Daylight Savings begins – Spring forward

March 17th                 St Patrick’s Day

March 20th                 Spring begins in US

March 21st                Purim – Chag Purim Sameach to all of the Jewish faith


Sources: Yardeni Research, Advisors Perspective,, FactSet


Although information herein has been obtained from sources deemed reliable, its accuracy and completeness are not asserted. All opinions and estimates included in this report constitute the judgment of the financial advisor as of the dates indicated and are subject to change without notice. This report is for informational purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security.

Investing involves risk and you may incur a profit or a loss. Diversification does not ensure a profit or ensure against a loss. There is no assurance that any investment strategy will be successful.  Past performance is no assurance of future results.

Please consider the charges, risks, expenses and investment objectives carefully before investing. Please see a prospectus containing this and other information. Read it carefully before you invest or send money.

Information provided should not be construed as legal or tax advice.  You should discuss any tax or legal matter with the appropriate professional.


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