Stocks continued to rally in May, with the S&P 500 Index rising by 6.3% in the month. Since the April 8th low, the Index has risen 18.7%, as investors appear to remain optimistic that the economy can avoid entering a recession. As for fixed income, bonds struggled in May, as reflected by the -0.6% return for the Bloomberg US Aggregate Bond Index. Interest rates rose in the month, explaining much of the negative performance.
As we head into summer, seasonally a weak period for equities, the US economic picture remains somewhat muddled with several proven recession indicators sending a mixed message concerning the near future. For example, while retail sales and wage growth have been relatively strong, new orders in manufacturing (PMI) have contracted, and job sentiment has turned negative. Adding to the confusion is the uncertainty about US tariffs – will they be negotiated lower or even rescinded, or will a global trade war suddenly erupt?
In past client missives, we’ve mentioned how we greatly rely on our disciplined investment process to navigate through the economic landscape successfully. To help illustrate why client portfolios are positioned with over- and underweight exposures versus relevant benchmarks, I often show charts from several of our indicators, which hopefully make evident the reasoning behind our current investment stance. What follows are charts from two additional trusted indicators.
The unemployment rate can serve as a very prescient signal for eventual equity market moves. The chart below shows the S&P 500 in the upper inset (red line) and the unemployment rate in the lower inset (green line).
When the unemployment rate has risen above its longer-term moving average (blue line), stocks have typically declined not long after (see orange vertical lines). Notice that the unemployment rate rose above its moving average in late 2023 (one of several reasons for our defensive positioning since then) but the S&P 500 has climbed higher in that time. We believe the approximately $5 trillion in COVID-related stimulus worked to postpone or push forward the normally-anticipated adverse market reaction to this indicator’s signal. As a reminder, it’s always dangerous to assume “it’s different this time,” i.e. that it’s now safe to ignore this signal. Patience is a virtue….
The other indicator I wanted to show was the relative price of lumber vs. gold:
The upper inset in the above chart shows the S&P 500 (green line) and the lower inset shows the relative price of lumber vs. gold. Note that I used several moving averages to represent the relative price of lumber vs. gold, in an effort to smooth the price movements, removing some of the “noise” or excess volatility. In general, for the S&P 500 to be in a healthy bull market, the relative price of lumber vs. gold should likewise be rising or in an ascending trend. For example, when the S&P 500 surged higher from 2012 to 2014, and again from 2016 to 2018, the relative price of lumber vs. gold also surged higher, confirming the strength of the rise in equities.
The rationale supporting this indicator is the price of lumber is very economically sensitive whereas the price of gold is very sensitive to investor sentiment. When the relative price of lumber vs. gold is rising, it’s an indication that the economy is strong as the price of lumber is firm or rising (due to high demand) and also that the price of gold is relatively weak likely due to bullish investor sentiment (gold is desired during bearish investor sentiment).
Since 2022, the relative price of lumber vs. gold has been in a well-defined downtrend, and yet the S&P 500 has moved higher in that time. Is it once again likely due to the $5 trillion in COVID-related stimulus? Or is it truly different this time? Regardless, the fact remains that this indicator has not confirmed the strength or health of the S&P 500’s advance since late 2022.
It’s important to emphasize that we do not arrive at our investment decisions based on just a few indicators, but rather we track many and attempt to discern a cohesive investment thesis based on the confluence of signals from all our indicators & data.
That said we remain defensively positioned in client portfolios as we continue to believe the current environment warrants an emphasis on capital preservation over seeking more speculative sources of returns.
If you have any questions, please feel free to call or email.
The entire team at Measured Wealth wishes to thank you for entrusting us to deliver on your financial goals.
Edward Miller, CFA, CMT
Chief Investment Officer
Measured Wealth Private Client Group
Important Disclosures
Historical data is not a guarantee that any of the events described will occur or that any strategy will be successful. Past performance is not indicative of future results.Returns citied above are from various sources including Factset, Bloomberg, Russell Associates, S&P Dow Jones, MSCI Inc., The St. Louis Federal Reserve and Y-Charts, Inc. The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information and should not be considered a solicitation for the purchase or sale of any security. Investing involves risks, including possible loss of principal. Please consider the investment objectives, risks, charges, and expenses of any security carefully before investing.
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Measured Wealth Private Client Group, LLC is an investment adviser located in Portsmouth, New Hampshire. Measured Wealth Private Client Group, LLC is registered with the Securities and Exchange Commission (SEC). Registration of an investment adviser does not imply any specific level of skill or training and does not constitute an endorsement of the firm by the Commission. Measured Wealth Private Client Group, LLC only transacts business in states in which it is properly registered or is excluded or exempted from registration.
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