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Veteran stock strategist Dr. Edward Yardeni is now in the bull camp -- he thinks a rolling recession has become a rolling expansion.

The Conference Board’s leading indicator index has indeed rolled over for 15 months, consistent with a Fed Funds rate hiking cycle.

BUT Ed Yardeni’s Coincident Indicators series just hit a fresh peak!

Below, I show FRED’s four Coincident Indicators, in a 23-year time series. All four are quite strong.
 

Image Source: Zacks Investment Research

Now, from Liz Ann Sonders, Chief Strategist at Schwab, we got another important insight.

She writes that it is:

"Important to look at leading indicators relative to coincident indicators... historically, this ratio has given reliable signals for peaks and troughs in cycles; and as of now, leaders continue to lag at significant pace.”

That statement, and the bearish status of that macro indicator ratio, infer a U.S. recession looms.

In light of that, there is a giant discrepancy between the two stock and macro strategists.

We now have a bearish LEI/Coincident ratio signal, one that typically calls a bottom in U.S. recessions, and a major bullish turn up in stocks, without a U.S. recession in hand.

One thought-provoking option? The leading to coincident indicator ratio is going to get much, much worse before that ratio actually bottoms.

Another option?

Unprecedented U.S. fiscal policy (where the Infrastructure Package contains a rider to spend ALL fund before Jan. 1st, 2024) is overriding rapid, ongoing policy Fed Funds rate-hiking effects, this cyclical time around.

This very seasoned, jobs-driven U.S. Democratic Party administration, has to stand in a Presidential election on Tuesday Nov. 5th, 2023.  

A rider in the infrastructure spending package requires ALL spending to end seven weeks later.

Brilliant!

The U.S. Treasury Yield Curve inversion, which must play a major role in the Conference Board’s Leading Indicators (LEIs), likely reverses when the Fed Funds policy rate starts to get cut.

Likely that happens next year. Forward-looking stock markets have seen that before it arrives.

Stock Markets (and CME Fed Funds futures) have already started to mark a Fed Funds policy rate turn in 2024, and have begun to price it in.

That’s the bull’s main argument.

Still, the current 15 months of consecutive decline of monthly Leading Economic Indicators (LEIs) has been unprecedented.

To my count, 6 out of the last 8 U.S. recessions would have been in hand by now, going from 1961 to 2023.

Given this, I offer two thought-provoking macro-options for 2024.

One is multiple more months of consecutive declines in LEIs, indeed leading to an epic U.S. demand collapse, manifesting in a U.S. recession.

A key insight here? Getting to something like 24 months of declines in LEIs really would be serious.

The other is the unwinding of the first two-to-three year’s long global supply shock from the recent global pandemic, the first such event since just after WWI.

Ending that restoration in a few months’ time would reshape the narrative in a totally different way.

2024 must either contain either an epically big U.S. downturn (NOT a smallish one), or the wimpy end to a once-in-a-century global supply shock.

Note: The S&P500 trading at 4,480 in midsummer 2023 is forecasting the latter.

Seven (FAANMG plus TSLA) big mega-cap companies support the S&P500. They also hint that Big Tech means structural real growth (which can override cyclical Fed Funds driven change).

We all like to think Small Tech drives GDP growth. But Small Tech gets swallowed by Big Tech these days.

Absent those seven companies, we have a P/E ratio of sideways trading stocks in a soft landing.

Next year, those seven Big Tech companies are not going away.

I propose this diagnosis:

The ongoing march — to new record highs in Coincident Indicators — is consistent with ongoing expansion in supply chains, recovering from a global supply shock, and stimulated by ongoing U.S. fiscal support.

The monthly series of declines — in the Leading Indicators (the LEI’s) — is evidence of a tardy FOMC policy rate-setting committee, actively trying to slow down U.S. cyclical demand growth.

Added to that, the U.S. has an incredible amount of stimulus in the pipeline. Think of the Chips Act, Inflation Reduction Act, a trillion-dollar infrastructure plan. This U.S. Fed is fighting against all of it.

One of the better developments for a hawkish Fed is the resumption of student loan payments. That will slow down consumer spending a touch. It will act as a tax.

Speaking on behalf of the bulls, United Rentals ((URI Quick QuoteURI - Free Report) ) said last quarter that demand is so strong they don't expect the normal recession slowdown, at least as of now.

Also keep this in mind. This turn down in LEIs has been remarkably shallow, in keeping with a posited ‘soft landing’ engineered by the FOMC and Chair Powell.