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These 3 charts hint that the economic recovery could be fading

Brian Sozzi

The stock market has been all over the map in March as investors debate the real strength of the global economy. It hasn’t been easy for them, that much is for sure.

An overly dovish Federal Reserve — along with their downwardly revised GDP estimates for 2019 and 2020 —suggest a policy body concerned with the short-term outlook. Their worry makes sense: GDP growth in the first quarter may be sub-1% due to the lingering affects of the government shutdown, terrible weather and a fall 2018 stock market swoon that walloped consumer confidence.

Meanwhile, corporate earnings have been mixed at best. Economic data from Europe has stunk. China’s economy continues to cool. The yield curve has inverted for the first time since 2007. There is no U.S.-China trade truce yet.

An argument could be made that March will end with investors having more reasons to be bearish into the spring than bullish.

After all, absurdly easy Fed policy isn’t an elixir for every problem the market is currently fixated on.

“We think that the recent inversion of parts of the U.S. Treasury yield curve is a bad sign for the S&P 500, which we expect to fall sharply over the rest of this year as growth in the U.S. economy disappoints,” writes Capital Economics.

Obviously not everyone on the Street subscribes to the glass half empty feeling.

“We believe consumption growth will remain solid, given strength in underlying drivers of consumer spending, as well as resilience in key correlates of consumption growth,” said Goldman Sachs Chief Economist Jan Hatzius. More broadly, we continue to believe growth will remain at an above-trend pace through the end of 2019, given strong job growth momentum, the recent easing of financial conditions, and a stronger-than-expected 2018Q4 GDP reading suggesting solid underlying momentum.”

Shocker with that view from the white glove investment bank. In fact, an upbeat call by Goldman strategists this week — that an inverted yield curve doesn’t mean a recession is near —has given stocks a short-term bid following pressured trading a week ago.

Economic recovery has run its course

But analyzing the market and economy sometimes doesn’t have to be that hard. Asset prices change in real time and patterns form as trading sessions build on one another. Here are three simple charts from Yahoo Finance that hint the global economic recovery has run its course, and investors may want to approach risky assets with greater caution than earlier this year.

Chart 1: SPDR S&P Retail ETF

  • Yahoo Finance ticker symbol: XRT

The ETF’s holdings are a who’s who look into the minds of consumers. Amazon (AMZN), Tiffany & Co. (TIF), and Ulta Beauty (ULTA) are a few of the top names. The XRT has trailed the broader stock market since the first week in March, despite the promise of low interest rates from the Fed (which should, theoretically, spur credit card spending).

Can you say red flag?

Fueling concerns on consumer spending include: (1) Meager 20,000 increase in headline February employment; (2) Weakening consumer confidence thanks to the fall stock market meltdown, among other factors; and (3) Soft results and guidance from Tiffany & Co., which experienced sales slowdowns in most of its major markets in the fourth quarter; and (4) Nike’s (NKEsales in North America in the most recent quarter missed analyst estimates.


Chart 2: Dow Jones Transportation Average

  • Yahoo Finance ticker symbol: DJT

The thinking on Wall Street is often that for a broad market rally to be confirmed, it has to be led by transportation stocks. A strong global economy equates to filled trucks and railroad cars, and nicely booked airlines.

Unfortunately, the Dow Transports have lagged the Dow, S&P 500 and Nasdaq Composite the past month. Zoom out a bit, and you will see the Dow Transports have relatively lagged since early December in the face of the hot start to trading in January.

A poor quarter and outlook from transport giant FedEx (FDX) did nothing to improve sentiment on the health of the global economy. If the underperformance persists, it would be a sign the U.S. economy’s first quarter weakness may continue into the second half of the year.

Dow Jones Transportation Average (DJT)

Chart 3: NYSE Arca Airline Index

  • Yahoo Finance ticker symbol: XAL

The NYSE Arca Airline Index tracks the performance of the major airline companies. And boy, has the news flow been bad here, putting pressure on the index.

Boeing’s (BA) major problems with the 737 Max have disrupted operations for all airlines as the planes were ordered grounded by the U.S. government. Southwest warned on Wednesday its costs have spiked stemming from issues from the grounding.

But it was Southwest’s (SUV) comments on “further softness in leisure passenger demand” from a February 20 update for investors that is the key concern here. It suggests a global economy with little momentum entering the second quarter.

Taken together, it’s clear the significant underperformance of the Airline Index is both warranted and signaling more economic weakness ahead.

NYSE Arca Airline Index

Brian Sozzi is an editor-at-large at Yahoo Finance. Follow him on Twitter @BrianSozzi

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