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

Bedel Barometer

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What's this?

Updated February 2016

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: Negative

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

Recent Highlights:
2015 was full of event surprises which resulted in a turbulent year for the equity markets. After a rough late summer and early fall, we saw a relief rally in October which resulted in a stellar month for the U.S. markets. DJIA and the S&P jumped 9% and 8%, respectively, which erased the large third quarter declines. Despite a rocky year in 2015, the S&P 500 managed to squeeze out a 1.2% return when including dividend reinvestment. 2016 got off to the worst start in US stock market history. So far this year both the S&P 500 and the Dow Jones Industrial Average are down about 7% and 8% respectively.

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 bounced back in November after being unchanged in October. Real consumption spending increased 0.3% while real disposable income increased 0.2% compared to 0.3% in October. Nevertheless, consumers seemed to hold back spending on services. Although growth appeared to have slowed slightly in fourth quarter, the general trend in the domestic spending remains solid.

Manufacturing Activity Rating: Negative

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: The domestic manufacturing sector continued contracting in December coming in at 48.2 compared to 48.6 in November. The overall softness is attributed to contraction in new orders, production, employment and raw material inventories.

Global manufacturing growth ended 2015 on a disappointing note, registering at 50.9 compared to 51.2 in November. In general, manufacturing was subdued as a result of the downturn of the emerging markets, with PMI registering below 50 for China, India, Brazil, Russia, Indonesia and Malaysia. Overall, the average PMI for the year was below both of the prior years.

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 fell in December by 0.1% after being unchanged in November. Overall, the cost of energy goods decreased while prices for a range of services rose moderately. Over the last 12 months, core inflation, which strips out food and energy costs, increased 2.1% while headline CPI, which includes food and energy, was up only 0.7%. Should this trend persist, inflation could be slow to rise towards the Fed’s target.

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 fell 10.7% in November to a seasonally adjusted rate of 4.76 million. This is the sharpest decline since July 2010 when the home-buyer tax credit expired. The median home price rose to $220,300 which is 6.3% higher than the same month last year and the 45th consecutive month of gains year over year.

New home sales increased by 4.3% in November to annual rate of 490,000 while October was revised downward to 470,000 from 495,000. The median new-home sales price rose 0.8% from a year ago to $305,000. Note that the new home sales report is typically very volatile and the data is frequently revised. We would need to several months of data before confirming a slowing trend.

Overall, although sales slowed towards the end of the year, the US housing market has strengthened for much of the year. Given the historically low mortgage rates and continued job growth, the overall momentum of the housing market continues to be positive.

Volatility Rating: Neutral

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 has increased since the beginning of the year. The VIX is trading now at 23.07 compared to the end of 2015 when it was 18.21. This is above 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:
  Although the recent spread of 0.39% (3-Month LIBOR 0.62% – 3-Month Treasury Bill 0.23%) has edged up, it is still well below the average historical spread of 0.60%. Data is as of January 20, 2016.

While past performance is not a guarantee of future results, the current score for the Bedel Barometer© is +2, which suggests solid growth in the foreseeable future.  

Score:  +2

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.       
Identifying “Outside the Box” Strategies

Identifying “Outside the Box” Strategies

While establishing an appropriate investment strategy with new clients, we take the time to consider every option, while ensuring the chosen plan does not have any negative unforeseen surprises. For example, if a client has several long-held stocks in their portfolio with very low cost basis, our first concern is the possible high tax consequence should they want to sell these holdings.  By taking the time to think “outside the box”, we may be able to accomplish another goal of the clients, such as gifting to family and charitable causes close the client.  By choosing to gift the zero-basis appreciated stock instead of cash to children or charities, the client is able to avoid having to pay long-term capital gains tax and the children and/or charity can benefit from this generosity, a win-win all around!