Stock Market Rally Ahead?

The stock market is likely to return to its highs by July, after it held support last week and as the US macro economic background improves into the summer.  The combination of a stock market rally and improving US economic data should weigh on Treasuries, as well.  An improving macro-economic background is predicted by the ECRI Leading Index  -- ECRI stands for Economic Cycle Research Institute -- which has risen sharply since mid-February (see chart below).

The ECRI Leading Index does a good job predicting speedups/slowdowns in GDP Growth.  The sharp improvement seen since mid-February points to a speedup in GDP Growth in the late Spring or early Summer.  Note that because of quarterly averaging, the speedup in GDP Growth may show up more in Q316 GDP Growth than in Q2 GDP Growth.  Note also that the improvement in the Index has slowed in the past few weeks.   So, it is not clear at this point whether GDP Growth will top out in Q316.

    a.  Early projections by Fed models support the idea of a speedup in Q216 Real GDP.  The Atlanta Fed's GDP Model's projects 1.7% (q/q, saar), while the NY Fed's model projects 0.8%.   Both are stronger than the 0.5% growth of Q116.

The possibility that GDP Growth may top out in Q316 could persuade the Fed not to hike rates in September (aside from considerations regarding the November presidential election).   But, evidence of stronger growth may very well get markets nervous that the Fed will hike at that meeting.  So, the risk now is that a rally in the stock market will stall in July.

ECRI Leading Index  -- Chart begins July 2015, Last Peak Dec 2015, Latest Bottom Mid-Feb 2016, Latest Point is Week Ended April 29