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

Bedel Barometer

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

+7

What's this?

Updated January 2017

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:
After a volatile first half of 2016, the third quarter was characterized by exceptionally low levels of volatility in the markets followed by a rally in the fourth quarter. In general, the markets saw an upward move in risk assets despite the Brexit decision that stunned the markets around the world. Although September had a slight pullback, equities generally were up for the year. The S&P 500 rose about 11.9% while both mid- and small caps posted even stronger returns of 20.7% and 21.3% respectively. The performance internationally was mixed with developed markets barely squeezing out a 1.0% return while emerging markets were up 12.0%.

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:
Consumer spending increased in November by 0.2% or 0.1% adjusted for inflation which is less than the previous month of 0.4%. Spending on longer-lasting goods, such as cars and appliances, fell 0.6% while spending on services, such as doctor visits, rose 0.3%. Additionally, the personal saving rate declined to 5.5% from 5.7% previously. Personal income remained unchanged in November. Nominal wage and salary incomes declined by 0.1% compared to October, and real disposable personal income fell by 0.1% during the month.

Manufacturing Activity Rating: Positive

Why we watch it: The health of the economy is dependent on the health of the manufacturing sector. Historically, it has been the path to development and an important driver of economic growth. Domestic manufacturing activity is tracked by the Institute of Supply Management (ISM) which releases a monthly index while global activity is produced by J.P.Morgan and IHS Markit in association with ISM and IFPSM. 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 an 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: Manufacturing index was up more than expected in December, increasing to a two-year high of 54.7. The key components pointed to an improving trend: production (to 60.3 from 56.0), employment (to 53.1 from 52.3) and new orders (to 60.2 from 53.0) improved while the inventory index declined slightly.

Global PMI signaled a stronger improvement in the health of the manufacturing sector. PMI rose to 52.7 in December compared to 52.1 in November. This is the highest level since February 2014. Growth was led by US and Western Europe regions. Although the Asian region also improved, it had some nations registering contractions such as India, South Korea and Indonesia. Russia seemed to gather pace while the downturn in Brazil accelerated. In general, growth in 2016 was above that registered in in 2015 in the intermediate goods industry but slower with producers of consumer and investment goods. 

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:
Headline CPI increased 0.2% in November. Over the last 12 months, the CPI rose 1.7% while the core CPI, which excludes food and energy, rose 2.1%. In general, while headline inflation remains very low, most other areas of the economy are seeing moderate price increases.

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 increased by 0.7% in November to a seasonally adjusted annualized rate of 5.61 million units, the fastest pace since February 2007. Sales of single-family units fell by 0.4%, while sales of condos and co-ops rose 10.0% compared to October. The median home price climbed 6.8% from November 2015 to $234,900. Unsold inventory is at a 4 months supply at the current sales pace. A three to six-month supply is considered a healthy balance between supply and demand.

New home sales increased more than expected in November. Sales rose by 5.2% in November to a seasonally-adjusted annualized rate of 592k units. Breaking it down by region, sales were higher in the Midwest (+28k) and West (+11k), unchanged in the Northeast, and lower in the South (-10k). The stock of new houses for sale edged down to 5.1 months of available supply from 5.2 previously. Note that the new home sales report is typically very volatile and the data is frequently revised.


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:  After spiking to 22 following the uncertainty of the presidential election, volatility has dropped back down. The VIX is trading now around 12. This is below the 20-year average of 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:
  Current spread is 0.47% (3-Month LIBOR 1.00% – 3-Month Treasury Bill 0.53%). Although the spread is creeping up, it is still below the average historical spread of 0.60%.

While past performance is not a guarantee of future results, the current score for the Bedel Barometer© is +7, which suggests solid growth in the foreseeable future.


Score:  +7

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.       
Turning Capital Losses into Client Gains

Turning Capital Losses into Client Gains

When working with business owners who have a fairly significant capital loss from their business, we may be able to utilize those losses by converting a large portion of an IRA to a Roth IRA. Doing so will allow the business owner to move those tax-deferred dollars to a tax-free bucket while paying little to no income tax. Now those converted dollars will grow tax free for retirement.

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