While my main focus is technical analysis and analyzing and monitoring price action, part of my job as a Portfolio Manager at the asset management firm I work for is to also monitor economic changes. I have two economic models that I track which have done a fairly good job at measuring the economy and forecasting recessions. Neither of my models are suggesting we are on the brink of a recession and if they did, it would still take a backseat to price action as I form my market opinion.
However, I do find it interesting that Industrial Production peaked (so far) back in late 2014. This set of data is not very volatile and remains in well-established trends most of the time. So the fact that it’s been declining for the bulk of 2015 is interesting to me.
Below is a chart of Industrial Production going back to 1988 along with a 20-period Moving Average and I’ve included the S&P 500 in the top panel just for fun. You can see what I mean when I said that Industrial Production, at least for the last almost-30-years, has stayed in some kind of trend – up or down – most of the time. I took the data back to ’88 to show there have been instances where the data began to whipsaw without a trend, to remind you that nothing is perfect or trends 100% of the time.
I’ve put the 20-MA to help define the trend and also because it’s interesting to see how the market ‘reacts’ when industrial production declines below this Moving Average. We saw this happen in March ’08, Jan ’01, and Oct. ’90. Now we obviously are still above the long-term Moving Average at the moment. But it does seem like we may be seeing the start of a change in trend for this piece of economic data, which has previously led to some rough periods in the past. Which makes the conversation about the Fed raising rates that much more interesting.
The next question we must ask, and it’s the million dollar question, is does Industrial Production still matter? This reminds me of a post I wrote about semiconductors replacing copper as an indicator of risk-taking. Does the same idea apply here? Has our economy shifted away from being an industrial powerhouse enough that we can still see solid economic growth without the industrial complex?
That’s the question we must ask and it’s the question we do not have an answer for. I think if we see a continuation of deterioration in this data set, it will jump on the radar of many fund managers. If enough people deem it important, the market will likely grant their wish and make it so. Time will tell, and luckily those that follow price will be the first to know.
For now, let's just say the chart of Industrial Production declining peaked my interest. I thought it worthwhile to share.
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