Global (i.e. G7 plus E7) six-month industrial output growth is estimated to have fallen to a 29-month low in December – only Canada has yet to release data. Industrial output momentum, suitably scaled, correlates closely with GDP growth, suggesting weakness in forthcoming data for the latter – see first chart.

The central scenario here, based on narrow money trends, is that industrial output momentum will decline further to a low around July, with little immediate recovery. Suppose that this timing proves correct and – though not currently signalled – global growth rebounds significantly in late 2019. Would such a prospect warrant a belief that global equities bottomed in December and have embarked on a sustainable upswing?

To address this issue, we examined the behaviour of global stocks around previous troughs in economic momentum. There have been 13 lows in G7 plus E7 six-month industrial output momentum since 2000, associated with downswings of varying severity. These troughs, and the associated prior lows in six-month real narrow money momentum, are highlighted in the second chart.

The red squares in the third chart, showing the MSCI World index, mark the dates of these economic momentum troughs. Nine of the 13 instances were associated with in an equity market reversal from weakness to sustained strength. In the other four cases, stocks fell after the low in industrial output momentum – so an economic turnaround later in 2019 is no guarantee of a resumption of a bull trend in equities.

In the nine cases where equities reflected the economic shift from slowdown to recovery, the market low occurred, on average, 2.4 months before the trough in output momentum – these lows are highlighted by the green crosses on the chart. The maximum market lead was six months, with one instance of a one-month lag.

On the basis of this experience, a July 2019 trough in industrial output momentum might be expected to be foreshadowed by an equity market low in April or May. A December 2018 bottom, implying a seven-month lead, would be outside the historical range.

Relatively long leads – of five and four months respectively – occurred in 2010 and 2012. Equities may have rallied early because of expectations of additional QE, confirmed by subsequent Fed announcements. The Fed has recently taken further rate rises off the table but QT is likely to continue at least through mid-year. An easing move is implausible barring renewed market declines and / or shockingly weak economic news.

The assessment here is that current economic conditions resemble those in late 2000 / early 2001. Global industrial output momentum reached a major low in June 2001, rebounding strongly in 2002. Equities rallied briefly ahead of this trough before plunging again, with an eventual low reached in October 2002. The reversal lower was influenced by the 911 terrorist attacks but, in addition, valuations were still unusually high in mid-2001 – fourth chart. Current valuations are less extreme, arguing against a similar prolonged divergence of economic and market trends.