The business cycle drives the markets.

My work has always been anchored on the effect of the forces unleashed by the business cycle. I realize the press, the actions of the Fed and the administration seem to give the impression they change the trend of the market. I do not think so. They create noise and not much else. 
The markets respond to fundamentals. Equities are not growing because the economy is not growing. They fluctuate around an average pace, which reflects the speed of the economy.  
Unfortunately the economy is still in a phase of declining growth. 
The purchasing managers’ report shows growth in manufacturing and services is almost nonexistent.  
Business sales continue to decline as if we were in a recession. Inventories are expanding as sales are contracting.  This is a very important relationship totally immune to external jawboning. 
The reason is that it involves business decisions. When sales decline while inventories rise, business reacts as it should in order to cut costs. It reduces production until inventories are in line with sales. This is exactly what is happening.
 Production keeps sagging. Retail sales have also stalled. They are at the same level as in July 2015. 
The model of the Atlanta Fed reflects the weakness of these data (see above graph) and is saying GDP was growing at a dismal 0.3% (annualized rate) in Q1. This is just a rounding error in the big scheme of things.

Bottom line – The economy stalled in Q1 as we anticipated. This weakness is likely to carry on in Q2. It will continue to have a negative impact on the price of commodities (including oil), yields, earnings and ultimately on the main trend of the equity market.  
(This analysis appeared in the issue of 4/24/2016 of The Peter Dag Portfolio)
Investment implications will be discussed in depth in the next issue of The Peter Dag Portfolio.

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George Dagnino, PhD
Editor, The Peter Dag Portfolio
Since 1977 
Author, Profiting in Bull and Bear Markets

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