The stock market is a major leading indicator that rallies on optimism in the economy. Stocks represent the sum progress of companies in the present with a premium for what is expected in the future. Often these economic expectations mirror stock prices, but eventually, the stock market leans ahead of its skis requiring commensurate ‘realized’ economic growth and profits to avoid faltering. With economic sentiment surging to 11-year highs despite 8 years of slow GDP growth, we are now witnessing signs of economic acceleration to justify some of this ebullience.
Global trade is one way to view the ebbs and flows of the actual economy. US exports and imports fell sharply during the global fossil fuel recession from 2014 to 2016. As Oil bottomed at $26 in early 2016 and ballooned back above water to $56, the forward-looking stock market and trade flows also rebounded. As we often say, strong moves in Oil and Copper are good leading indicators for our economy.
The euphoric Trump sentiment elevating stocks is also being supported by real numbers coming out of Europe. The Eurozone has been a significant drag on global growth since 2011 and now could be considered a leader. Unlike our Fed, their Central Bank has kept its foot on the gas with continued Quantitative Easing (QE) in spite of an accelerating manufacturing sector that may be exceeding the robust US performance. Virtually all of Europe has kicked into a higher gear since November reaching 70-month high expansion rates in new orders, backlogs, and production. Even France has turned from perennial laggard to one of the leaders of the important Eurozone. Japan, UK, and China are also showing signs of actual growth that justifies rising expectations coincident.
This post was published at FinancialSense on 02/23/2017.
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