More troubling news for the economy

From Justin Brill, Editor, Stansberry Digest:

Last Thursday, we learned U.S. wholesale-price inflation may be peaking…

That morning, the U.S. Bureau of Labor Statistics (“BLS”) reported wholesale prices – as tracked by its Producer Price Index (“PPI”) – fell by 0.1% in March. This was the first month-over-month decline in seven months.

On Friday, we learned that U.S. consumer price inflation could moving lower again, too…

The BLS reported its Consumer Price Index (“CPI”) rose 2.4% over the past 12 months, down from a five-year high of 2.7% in February…

Like the PPI, this measure remains well into positive territory. But here, too, there could be cause for concern…

This is because the BLS also reported consumer prices fell by a seasonally adjusted 0.3% in March. This marks the first month-over-month decline since February 2016.

More concerning, so-called “core” CPI – which excludes more volatile food and energy prices – fell by 0.1% month over month. According to the BLS, this is the first month-over-month decline in core CPI since January 2010.

Both producer and consumer prices are now falling together for the first time in years. As we noted last week, this could be an early warning that the big reflationary trend that began last summer is faltering.

In related news, the slowdown in “soft” data continues…

As regular readers know, we’ve been tracking the divergence between so-called “soft” economic data – survey-based indicators like consumer sentiment and small-business optimism – and “hard” (or quantitative) data. From the April 3 Digest

As you can see in the graphic below, soft-data measures have soared since November’s election. But hard-data measures have yet to follow…

Since then, the gap has been closing, but not in the way we had hoped…

Last week, we noted three widely followed economic surveys – the Markit U.S. Services Purchasing Managers’ Index (“PMI”), the Institute for Supply Management’s (“ISM”) Non-Manufacturing Report on Business, and the National Federation of Independent Business’ (NFIB) monthly survey of small-business sentiment – all came in weaker than expected in March.

This morning, the trend continued…

The Federal Reserve Bank of New York reported its Empire State Manufacturing Survey plunged to just 5.2 this month. This survey polls corporate executives on their current view of the New York region’s business climate.

Any reading above zero represents improving conditions, so today’s report remains positive. But the index has now fallen for two consecutive months. It is now down a huge 13.5 points from a two-year high of 18.7 in February.

We’ve also been following the recent rise in volatility…

Last Wednesday, we noted that the market’s “fear gauge” – the Volatility Index (“VIX”) – had jumped back above 15 for the first time since November’s presidential election.

As we’ve discussed, if there is one certainty in the markets, it’s that periods of market calm and complacency (when the VIX falls into the teens or lower) are always followed by periods of volatility and fear (when it leaps above 20).

It’s only a matter of time before volatility moves much higher again… and stocks experience a significant correction.

But according to our colleague Ben Morris, history suggests we could be waiting a while longer…

Back in March, we shared Ben’s initial research on the VIX and the S&P 500 Index. He found that whenever the VIX remained at or below 13 for more than two months – like earlier this year – stocks tended to struggle over the next few months.

Following last week’s new highs in the VIX, Ben updated his subscribers on that study. From the April 12 issue of DailyWealth Trader

My advice last month was to be a little more careful with the timing of your purchases… and to be ready for your bullish trades to not work out as well right out of the gate. This turned out to be good advice, as the market has continued lower…

It has now been nearly six weeks since the latest two-month stretch with low volatility (which ended on March 2). And the S&P 500 is down 1.2% since then. That’s right in line with history.

As Ben noted, history suggests these weak periods tend to last three months, so we should be prepared for a little more downside ahead over the next several weeks. But he also reaffirmed his call that stocks could head much higher after that…

In every case, the 12-month returns were higher than the three-month returns. And in some cases, they were far higher… From month three to month 12, the S&P 500’s returns ranged from 1.2% to 19%, with an average of 8.1%. Those were excellent nine-month stretches…

In other words, after the short-term pullbacks, stocks ripped higher.

But Ben also took a fresh look at the data…

He wanted to see how stocks performed after the VIX jumped back above 15 for the first time in at least three months. And the results were surprisingly bullish…

Again, such long periods with the VIX this low are rare. Since 1990, we’ve only seen eight other stretches of at least three months with the VIX below 15.

vix-table
As you can see, a major drop didn’t occur in any of these instances… And five out of eight times, we saw double-digit gains over the following 12 months.

As always, the market offers no guarantees. But Ben says history is clearly on the side of the bulls this year…

My takeaway from all this: We may see some more downside in the market over the next month or two… But I don’t expect a major correction (of 10% or more).

Do not be shy about opening new positions in stocks. We’re in a bull market… And in the past, similar situations with the VIX have led to double-digit gains. This will likely be a great year for your portfolio.

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