International | Sep 28 2018
By Kathleen Brooks, Research Director, Capital Index
The Fed may have raised its GDP projection for 2018, however, bad omens for US growth are starting to mount. The Markit PMI report for September saw a steep decline in the composite index, which fell to its lowest level since June 2017. As you can see in chart 1 below, the Markit PMI index has a strong positive correlation with US GDP. Thus, the decline in the PMI survey does not bode well for US growth.
The Fed’s upward revision to the 2018 full year GDP report points to a sharp slowdown in growth in Q4, to the tune of 1.3%. Thus, investors should get ready for a slowdown in the US economy.
As you can see in chart 2, GDP matters for the performance of US stocks. Chart 2 shows the S&P 500 and year on year US GDP. The chart has been normalised to show how they move together. As you can see, US GDP and the S&P 500 tend to move in the same direction. As US GDP has jumped to some of the highest levels in the developed world in recent quarters, the S&P 500 has reached record highs. Likewise, as GDP dips it tends to lead to a period of weakness for the S&P 500. If this relationship holds, as we expect it to, then as GDP moderates the S&P 500 could come under pressure.
We could see the S&P 500 struggle as early as next week when we get the start-of-the-month data dump, including official PMI data and US payrolls. If this shows a moderation in US growth, then US stock performance could be at risk.
Disclaimer: The information and opinions in this report are for general information use only and are not intended as an offer or solicitation with respect to the purchase or sale of any currency or CFD contract. All opinions and information contained in this report are subject to change without notice. This report has been prepared without regard to the specific investment objectives, financial situation and needs of any particular recipient. Any references to historical price movements or levels is informational based on our analysis and we do not represent or warrant that any such movements or levels are likely to reoccur in the future. While the information contained herein was obtained from sources believed to be reliable, the author does not guarantee its accuracy or completeness, nor does the author assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions.
The trading of Foreign Exchange, and other leveraged products, involves significant risk of loss and is not suitable for all investors. Increasing leverage increases risk. Before deciding to trade forex, commodity or Index based CFDs you should carefully consider your financial objectives, level of experience and risk appetite. Any opinions, news, research, analyses, prices or other information contained herein is intended as general information about the subject matter covered and is provided with the understanding that Capital Index (UK) Ltd is not rendering investment, legal, or tax advice. You should consult with appropriate counsel or other advisors on all investment, legal, or tax matters. Capital Index (UK) Ltd is regulated by the Financial Conduct Authority (FCA) in the UK.
Risk Warning: Our service includes products that are traded on margin and carry a risk of losses in excess of your deposited funds. The products may not be suitable for all investors. Please ensure that you fully understand the risks involved. For a full risk disclaimer Click Here.
Capital Index (UK) Ltd is authorised and regulated by the Financial Conduct Authority (registration number 709693). Registered address at 2a EastCheap, London EC3M 1AE, United Kingdom.
Capital Index (Cyprus) Ltd is authorised and regulated by the Cyprus Securities and Exchange Commission (licence number 249/14). Registered address at Archbishop Makarios Avenue 89, Office No. 3, 3020, Limassol, Cyprus.
Technical limitations
If you are reading this story through a third party distribution channel and you cannot see charts included, we apologise, but technical limitations are to blame.
Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" – Warning this story contains unashamedly positive feedback on the service provided.
