The stock market and economy move in sync over the medium-long term. That's why it's extremely important to understand the state of a nation's economy. Is the economic data improving or deteriorating?
Let's take a look at U.S. economic data as of May 2018.
Unemployment
The U.S. Unemployment Rate continues to fall and trend downwards.
This is a medium-long term bullish sign for the economy. Historically, the unemployment rate tends to trend sideways or upwards before a bear market and recession begins.
The unemployment rate is extremely low right now (when compared to history). We aren't concerned yet, but we are watching out for a sustained increase in the unemployment rate.
U.S. inflation is rising very slowly above 2%. Indicators suggest that inflation won't deviate too far from 2.5% in 2018.
*Many investors expected inflation to “surge” in 2018. This is clearly not the case.
Initial Jobless Claims
Initial jobless claims continue to make new lows for this economic expansion. This is a long-term bullish sign for the stock market because jobless claims tend to rise before a bear market and recession begins.
*Initial Jobless Claims are very low right now (historically speaking). We are not concerned yet, but we are watching out for any sustained and significant increase in Initial Jobless Claims.
Nonfarm payrolls
Nonfarm payrolls have been trending sideways for the past few years. Nonfarm payrolls is not a leading indicator for the stock market or economy – it's a coincident indicator. This indicator peaks when the stock market and economy peak.
ISM Manufacturing PMI
ISM Manufacturing PMI has fallen for 2 consecutive months. This is a weak point in the economy. It's too early to make a judgment call right now – 2 months of data does not make a new trend. We are watching out for further deterioration in this economic data series.
