Bedel Barometer | Wealth Management and Retirement Planning | Bedel Financial Consulting, Inc. Indianapolis

Bedel Barometer

-6 -5 -4 -3 -2 -1 0 +1 +2 +3 +4 +5 +6

+6

What's this?

Updated August 2015

Back in 2009, we identified key areas that have historically been strong indicators of the strength in the U.S. economy. The idea was to use these indicators to determine whether the economy was going to rebound or remain in crisis mode in the year ahead.

In the short run, the Bedel Barometer should be used as a measure of the overall health of the U.S. economy—not as a sign of the health of the stock market. In the long run, the health of the U.S. economy should have a significant impact on the performance of the stock market. 

Since its inception, the Bedel Barometer has consistently had a positive score, suggesting the economy was initially moving toward growth and then sustaining that growth.

Here is how each indicator currently stacks up and its importance:

Stock Market Performance Rating: Positive

Why we watch it:
The stock market tends to be forward looking and it is a leading indicator of economic growth.

Recent Highlights:
Despite having a volatile year in 2014, the S&P 500 returned 13.6% which is very favorable given the strong returns in 2013. So far this year the S&P 500 is up 2.14% while the Dow Jones Industrial Average is down -1.04%.

Consumer Spending Rating: Positive
 
Why we watch it:
Over 70% of the U.S. economy is based on personal consumption. A reduction in consumer spending would cause a slower growth in the economy.

Recent Highlights:
Personal income continued to rise in June by 0.4%, while consumer spending edged up only 0.2% after a revised 0.7% rise in May. Consumers chose to cut back on big-ticket items such as cars and durables. Given the steady employment gains, economists are expecting a boost in consumer spending in the second half of the year. Overall, the trend is still positive.

Manufacturing Activity Rating: Neutral

Why we watch it: The health of the economy is critically dependent on the health of the manufacturing sector. Historically, it has been the path to development and the most important driver of economic growth. Domestic manufacturing activity is tracked by the Institute of Supply Management which releases a monthly index. The index monitors things like employment, production inventories, new orders and supplier deliveries. It is based on surveys of more than 300 manufacturing firms and it’s considered a very important economic measure. The index value ranges between 0 and 100. A value below 50 may indicate a slowdown in the economy, especially if the trend persists over several months. A value above 50 likely indicates a time of economic growth.

Recent Highlights: Domestic manufacturing sector expanded at a slightly slower pace in July than in June, 52.7, down from June’s reading of 53.5. Global manufacturing growth remained subdued during the second quarter. The JPMorgan Global Manufacturing PMI™ slowed slightly in June, coming in at 51.0, down from 51.3 in May as reported by Markit. Global manufacturing continues to send mixed signals. We continue to hold a neutral rating.

Consumer Price Stability Rating: Positive

Why we watch it:
Mild inflation is good for the economy, because it promotes consumption without destroying the value of people's savings. If you know something is slightly going up in price down the road, you'll be more likely to purchase it now. If this effect is mild, it doesn't hurt savings rates very much. Deflation, however, punishes an economy because it hurts consumption. If you know something will be cheaper tomorrow or next year, you're more likely to wait until tomorrow to buy it.

Recent Highlights:
U.S. consumer prices increased 0.3% in June, boosted by a 3.4% increase in seasonally-adjusted gasoline prices. Over the last 12 months, core inflation, which strips out food and energy costs, increased 1.8% while headline CPI rose 0.1%. It appears that inflation continues to remain tamed. Going forward, our view is cautiously optimistic as the effects in the aftermath of QE still remains to be seen.

Housing Market Rating: Positive

Why we watch it: The economy typically benefits directly and indirectly from increased housing activity. It is estimated that for every $100 in value resulting from housing construction an extra $40-$80 is added to the economy due to housing-related spending.

Recent Highlights:  Existing home sales rose 3.2% in June to a seasonally adjusted rate of 5.49 million. The momentum in the housing market seems to have accelerated as it hit an 8 year high. Tight housing supply have pushed up prices as the median existing-home price for all housing types rose 6.5% from a year ago to $236,000 which is above the peak price set in July 2006. Overall, sales rose 4.3% in the Northeast, 4.7% in the Midwest, 2.5% in the West and 2.3% in the South. Current sales pace represents 5 months of unsold supply.

New home sales declined by 6.8% in June from the previous month. Additionally earlier months were revised down by a net 49,000. Given the revisions, the current level of new home sales sits at 482,000 in June. This was lower than expected. Note that the new home sales report is typically volatile and the data is frequently revised.

Overall, given the strong demand, historically low mortgage rates and continued job growth, the overall momentum of the housing market continues to be positive.

Volatility Rating: Positive

Why we watch it:
  VIX is the symbol for the Chicago Board Options Exchange's volatility index. It’s a weighted mix of the prices for a blend of S&P 500 Index options, from which implied volatility is derived. In other words, it measures how much people are willing pay to buy or sell the S&P 500. The VIX goes up when there’s turmoil in the market, and goes down when investors are content or at ease with the economic outlook.

We like to watch the VIX, because it measures the cost of buying insurance for stock protection (through options). When the cost of protection is high, volatility is usually high and the potential for declining stock values is higher.

Recent Highlights:  Volatility continues to remain relatively low to historical levels. After reaching almost 20 in early July, the VIX is back down trading at 12.83. Note that the 20-year average is 20.

TED Spread Rating: Positive

Why we watch it:
The TED Spread is the Treasury’s cost of borrowing short-term money minus the banks’ cost of borrowing short-term money. When the spread is significant, banks worry about being repaid when loaning money to other banks, thereby creating uncertainty. This can cause slower growth in the economy.

Recent Highlights:
  The recent spread of 0.21% (3-Month LIBOR 0.31% – 3-Month Treasury Bill 0.10%) is well below the average historical spread of 0.60%. Data is as of August 14, 2015.

While past performance is not a guarantee of future results, the current score for the Bedel Barometer© is +6, which suggests solid growth in the foreseeable future.   


Score:  +6

Please remember that past performance may not be indicative of future results.  Different types of investments involve varying degrees of risk and there can be no assurance that the future performance of any specific investment, investment strategy, or product made reference to directly or indirectly in this article will be profitable, equal any corresponding indicated historical performance level(s), or be suitable for your portfolio.  Moreover, you should not assume that any information or any corresponding discussions serves as the receipt of, or as a substitute for, personalized investment advice from Bedel Financial Consulting, Inc. Portfolio Managers.  The opinions expressed are those of Bedel Financial Consulting, Inc. and are subject to change at any time due to the changes in market or economic conditions.       
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Great Loss Avoided

Many individuals have sizeable positions in their employers’ stock. While our crystal ball is not always clear about how a certain stock may perform, we go into great detail with our clients about the potential impacts that owning a large position can have with their long-term financial security.  For example, by discussing our concern with a client, they may decide not only to reduce their holding but eliminate the holding completely, especially if they no longer have a current correlation with the company.  By removing the large dependency upon a single company, the client would not longer need to be concerned with the chance that the company could announce devastating news, plummeting the stock price and jeopardizing their situation.  Obviously, timing is imperative but it does go to prove that a big difference can be made by having a simple conversation about risks and financial security.

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