When you look at the news, there is a lot going on. Between politics and geopolitics, the macro environment is more unstable than usual. We see the same on the economic front, for both macro and micro reasons. Economic growth is down and up. Job growth is up—or is it? Consumer and business confidence are down—or are they? And, of course, inflation and long-term interest rates have been trending down—until recently, when they started trending up again.
With all of this in play, markets are having a tough time figuring out where to go, especially when you factor in the earnings outlook. Earnings are down this quarter but are expected to rise through the rest of the year. Companies are worried, but that’s not what they are saying (really) on their calls.
To make sense of it all, to the extent we can, now is a good time to take a look at what really matters now. Here is what I am watching closely as the best indicators for how all this uncertainty resolves.
The Economy: Jobs and Confidence
Job growth and current consumer confidence are the numbers to watch. Job growth is obvious, as people need to work, but the key number here is 200,000 per month. Job growth has been consistently above that, and it is below that number that the economy starts to weaken. Current consumer confidence is less obvious, so let’s dig in a bit.
The confidence number that is reported has two different subseries: current confidence (which reflects how people feel right now) and expectations (which reflects how they expect to feel in about six months). The current number controls how they act now, and it has held steady for the past year and more, despite everything. That explains why the economy has held up much better than expected. If current consumer confidence starts to erode, that will be the key to weaker performance.
Jobs matter because working people make money to spend. Current confidence matters because that means they will spend right now. If both of those turn down, so will the economy. Until then, we are in good shape.
Inflation: Housing and Energy
Interest rates respond to what the Fed is doing, which in turn depends on inflation. So, inflation is what we need to watch. This is a broad category though, and we need to dive deeper.
As I have discussed before, the main item driving inflation right now is housing. If housing costs continue to soften, so will inflation. As such, I will be watching rental rates and housing prices around the country. At the moment, housing matters more than anything else for inflation, and that is what will drive any further declines.
The reason I say “at the moment” is that energy is returning as an inflationary concern. After serving as a disinflationary factor over the past several months, energy prices will return to neutral through the rest of the year and may, if they rise again, turn inflationary again. So watch gas prices, as a good proxy for energy, and watch housing. That will tell us what we need to know about inflation.
Markets: The Final Piece of the Puzzle
Markets, of course, draw from both the economy (for earnings) and interest rates (for valuations). For earnings, jobs and confidence will drive the economy. So far, at least, the news looks good, as analysts expect strong earnings growth through the rest of the year. For valuations, the news is less good, as rising long-term interest rates are back to levels from around the financial crisis, when valuations were lower. This explains much of the recent volatility, but it doesn’t tell us where it will be going.
4 Signals to Watch
So, that is what I am watching and why: jobs, current confidence, housing, and energy. It’s easier to focus on those four than everything all at once and likely just as effective, if not more so. Right now, the news remains positive. But those will be the signals we need to tell when and if that changes.