This morning, a reader asked a very heart-of-the-matter question for any stock market investor–are there any signs of recession that I see? My answer:

–I tend to be an optimist, so I may not be the best person to ask

–historically, the most important leading indicator for the state of the US economy is the US stock market. Yes, we’ve had a sharp selloff recently, the second so far this year, but the S&P 500 is still up by about 14% ytd in 2024, with the Nasdaq lagging that a bit. So I’d count that as a positive sign

–monetary policy remains restrictive, as the Fed attempts to counter pandemic-era stimulus. In other words, the monetary authority thinks the domestic economy is still running a bit too hot, not too cold. Also, the Fed is most likely going to lower short-term interest rates soon, adding stimulus for the domestic economy

–I read the market selloff as an issue about valuation rather than a sign that earnings are about to deteriorate

–on the (to my mind) negative side: food prices remain elevated; US consumers who rotated down to lower-priced stores for everyday merchandise during the recession (from supermarkets to Walmart, from Walmart to dollar stores, from dollar stores to companies not publicly traded (btw, I own shares of WMT, TGT and CASY)) as they usually do… haven’t rotated back up in the way they have in the past when times get better; and the recent implosion of the yen carry trade underlines the possibility for further unrevealed ugliness in private equity, the banks and hedge funds

–we can see the general lack of dynamism in the domestic economy through the Russell 2000 index of smaller-cap stocks, whose constituents are overwhelmingly geared to the domestic economy. Over the past ten years, it has risen 1.8x. In contrast, the S&P is ahead by 2.7x and the Nasdaq by 4x. Half or more of the profits of the latter two come from outside the US. So the negative I just cited may merely be the results of the anti-growth policies of today’s MAGA Republicans.