Covenant Weekly Market Synopsis for February 18, 2019

February 18, 2019

Last Week Today. January’s inflation data indicated that widespread pricing pressure continues to be a non-issue, supporting the Fed’s decision to lay down their interest-rate-hiking guns. | Retail sales fell 1.2% in January, pushing down the Atlanta Fed’s estimate of Q4 growth from 2.7% to 1.5%… a significant slowdown from the second and third quarter’s respective growth rates of 4.2% and 3.4%. December’s retail sales data were so shockingly poor that some economists dismissed them as inaccurate and expect a sharp upward revision in the coming months.


Reports on China/ US trade negotiations were positive, though non-specific, leading President Trump to announce he may extend the March 1st deadline for implementing new tariffs. | Congress and President Trump reached a border wall/budget compromise and averted another government shutdown that would have begun Friday. However, legal battles started percolating when President Trump declared a national emergency on Friday to reallocate funds to building a larger wall than the budget provided for, and these battles are unlikely to be resolved anytime soon. Indeed, dozens of court cases from President George W. Bush’s Secure Fence Act of 2006 that authorized the construction of about 700 miles of barriers along the border are still unresolved.

Despite the lackluster economic data, the Dow Jones Industrial Average gained 3.1% marking the 8th consecutive week of gains for one of the oldest, most well known and concentrated (30 stocks) stock indices in the world. The Dow is in the midst of its longest winning streak since 2017, which (if you recall) was one of the least volatile years on record for stocks. The following year, by contrast, saw two 10%+ stock market declines culminating in a nearly 20% decline for the S&P 500 in Q4. That 2018’s volatile Q4 would spawn eight weeks of consecutive gains would have seemed inconceivable on Christmas Eve, but ever since Santa Claus has been filling investors’ stockings as the U.S. stock market value has increased by $4.9 trillion (Wilshire Associates).

For detailed weekly, month-to-date and year-to-date asset class performance, please click here.

Mind the Gap. Consumer Confidence (as measured by the Conference Board) appears to have peaked in late 2018. While the overall level remains elevated on a historical basis, a closer look reveals a troublesome trend. Before highlighting the cause for concern, it’s important to point out that this closely monitored measure of consumer confidence consists of two sub-indexes:

  • The Present Situation Index – consumers’ assessment of current business and labor market conditions
  • The Expectations Index – consumers’ short-term outlook for income, business and labor market conditions.

The general pattern for these two indexes is that during periods of economic recovery, the Expectations Index will be higher than the Present Situation Index, as consumers anticipate better times ahead. On the other hand, in the mid-to-late stages of an economic cycle, the Expectations Index tends to lag the Present Situation Index as consumers grow increasingly skeptical about the future. While both data series are volatile, wide gaps between the Present Situation Index and the Expectations Index have presaged economic recessions.

We recently highlighted the growing spread between these indexes in our 2018 Mid-Year Review and Outlook. Since then, Expectations have continued to deteriorate even as confidence in the Present Situation has remained reasonably stable, pushing the difference to a level not witnessed since the turn of the century. This variance was highlighted in a tweet by DoubleLine Capital’s founder and noted market soothsayer Jeffrey Gundlach: “The most recessionary signal at present is consumer future expectations relative to current conditions. It’s one of the worst readings ever.” Indeed, the difference between the two surveys has only been wider three times in history going back to 1967.


In January, the Present Situation Index was virtually unchanged from last month suggesting economic conditions remain favorable. The Expectations component, however, declined sharply as Q4 stock market declines and the government shutdown soured consumers’ view of near-term future business conditions, job availability, and wage growth. Indeed, since October, the Expectations Index has plunged 24%, blowing out the spread to -82.3.

We caution that these indices are poor timing tools as the spread between consumer confidence in present conditions and expectations can remain wide for extended periods before economic growth turns negative. However, this situation bears watching because a confident consumer is imperative to economic growth since consumption is responsible for approximately 70% of the U.S. economy. If nothing else, the sentiment gap underscores the reality that the economy is growing at a much slower pace than it was last year.

Be well,