Surging Inventory to Sales Ratio Sets Off Stock Market Crash

The main reason of today's decline in stock markets is the declining wholesale trade sales and increasing inventory. The inventory to sales ratio is hitting a new high for the year and translates to this. Surging inventories are a leading indicator for declining GDP. And declining GDP equals plunging stock markets.

Remember the correlation here?

Inventories can be considered a part of a group of leading indicators of business cycles. Whenever inventories surge, a possible reason could be a decrease in consumer demand. The result is that producers will cut output and sales. This will translate in a lower GDP growth.

It is worthy to plot the business inventory to sales ratio against GDP growth.

Following chart shows that the blue line is leading the red line. As inventories build up and sales go down (blue chart goes down), GDP growth will follow the trend (red chart goes down).