The S&P 500 index is flat for the year, but that hasn’t been due to a lack of volatility. The index has traded within a 259-point range in 2015. This year is shaping up to be a disappointment compared to the stellar returns on stocks in recent years: 13.5% in 2014, 32.2% in 2013, 15.9% in 2012. The outlook for 2016 is even worse.
These six charts make a very compelling case for a stock market correction in the near future.
These 6 Compelling Charts Make the Case for a Stock Market Correction in 2016
The earnings recession
Earnings estimates for the S&P 500 have been sliding downward — from expectations of $137 in earnings in June to today’s expectation of $107. Wall Street expectations for shrinking corporate profits are a bad sign for the economy — yet stocks are flat on the year.
Junk bond warning bell
High-yielding (junk) bonds are sounding a warning bell. The average yield on the entire junk bond universe has increased 8% in 2015. This jump in yields is a big deal because the junk bond market is a leading indicator of the stock market. The high-yield bond market is screaming danger.
Retail sales are plummeting
Another leading indicator to pay close attention to is retail sales. Consumer spending — which represents roughly two-thirds of the US economy — has been in steep decline. These 6 Compelling Charts Make the Case for a Stock Market Correction in 2016 There has been a strong correlation between plunging retail sales and plunging stock prices.
Global trade has tanked
According to the International Monetary Fund, global exports for 2015 are shaping up to be the worst since 1957. That’s horrible! The decline in global trade has also been showing up in shipping rates. These 6 Compelling Charts Make the Case for a Stock Market Correction in 2016 The Baltic Dry Index — an index used to measure the cost of global shipping freight rates — has been making new record lows. Declining world trade is a clear sign of a slowing economy.
Record M&A activity is a dangerous sign
In November, the global merger and acquisition volume was the highest level on record. Year-to-date M&A activity in the US is already 43% higher than the previous record of $1.7 trillion set in 2007.
That’s a dangerous sign as M&A activity has a history of peaking just before a market crash. It happened before the Great Recession in 2007, in 1999 before the tech bubble burst, and before the 1929 market crash that set off the Great Depression.
High levels of M&A activity suggest that corporate insiders have little confidence in the ability to grow their businesses organically and instead have to resort to financial engineering.
Read the original article on Mauldin Economics. Copyright 2015.