by TSPninja
You’ve seen it said before, “the data isn’t in yet”. There is actually a lot more truth behind this than many think. Savvy investors do not make major sell moves without having data supporting indicators of a pending recession.
I have been redesigning my own long-term investment strategy (which was posted earlier, but I plan to post later with major improvements), based largely on Business Cycle investing theory. There are several key market indicators savvy investors use to help understand where we are in the business cycle, and conversely, whether they should buy, hold, or sell.
I took the key indicators from the TSP Allocation Guide website and modified the descriptions in a way that makes more sense to me and is easier to follow. I will paste it below. Follow the links to look at the key indicators and you will realize the data is not yet sufficient to say we have reached a recession. Keep an eye on these though, because once the numbers come out people will likely start making larger moves one way or the other.
Business Cycle Stage Indicators
Economic Data Calendar: www.marketwatch.com/tools/calendars/economic Macro Data: tradingeconomics.com/ Labor Force Participation: tradingeconomics.com/united-states/labor-force-participation-rate Unemployment: www.bls.gov/charts/employment-situation/civilian-unemployment-rate.htm# M2: fred.stlouisfed.org/series/M2 GDP: www.bea.gov/data/gdp/gross-domestic-product S&P 500: www.marketwatch.com/investing/index/spx Premarket Data: www.cnn.com/business/markets/premarkets/ Long/Short Government Yield Spread: fred.stlouisfed.org/series/T10Y3M AAA Corporate Yield Spread: fred.stlouisfed.org/series/BAMLC0A1CAAA BBB Corporate Yield Spread: fred.stlouisfed.org/series/BAMLC0A4CBBB/ Supply Chain Reports: www.instituteforsupplymanagement.org/Resources/index.cfm?SSO=1
Indicators Explained Copied from TSP Allocation Guide and modified for clarity (source at end of post)
(1) Employment Numbers: no indicator has more closely tracked the business cycle than labor force participation rates (which is the ratio between employed workers and all people in that age range), and the unemployment rate (which is calculated as a percentage by dividing the number of unemployed individuals by all individuals currently in the labor force). To make it very simple, as long as the unemployment rate is declining, that indicates to me that we are in the early recovery/expansion phase. When it flattens out, we are usually in the prosperity phase. As unemployment starts to increase, even a little, we are generally well into the late prosperity phase. And when unemployment increases dramatically, we are in recession. Labor Force Participation: tradingeconomics.com/united-states/labor-force-participation-rate Unemployment: www.bls.gov/charts/employment-situation/civilian-unemployment-rate.htm#
(2) Money Supply Growth Rate: this is an index of deposits at commercial banks and other institutions which accept deposits and is called M2. The growth rate corresponds well with the growth rate of GDP, and is generally available more quickly than GDP so it is a more timely indicator. Declining M2 and GDP may indicate a pending recession. M2: fred.stlouisfed.org/series/M2 GDP: www.bea.gov/data/gdp/gross-domestic-product
(3) The Stock Market: the market generally anticipates movements in the economy – in recessions profits and earnings are down so stock prices should begin to fall as soon as a recession is anticipated by the market. Every post-World War II downturn in the economy has been at least matched, if not anticipated, by the stock market. The problem is that there have been several downturns in the stock market which didn’t turn into recessions (the October 1987 crash, for example, which was followed by several years of continued growth). This should not be the only indicator used. S&P 500: www.marketwatch.com/investing/index/spx Premarket Data: www.cnn.com/business/markets/premarkets/
(4) Yield Spreads: the difference between yields on long- and short-term government bonds, and the difference between yields on high- and low-grade bonds. Both of these have been useful in predicting downturns in the economy historically, but actions taken by the Federal Reserve to artificially hold interest rates low for extended periods of time (as it is currently doing) can throw the predictive value of these spreads into doubt.
Long/Short Government Yield Spread: fred.stlouisfed.org/series/T10Y3M AAA Corporate Yield Spread: fred.stlouisfed.org/series/BAMLC0A1CAAA BBB Corporate Yield Spread: fred.stlouisfed.org/series/BAMLC0A4CBBB/
(5) Purchasing Managers’ Index (PMI): monthly surveys of private sector companies which measure both sentiment and hard numbers. Important for projecting are the trends indicated by comparing the current numbers to those from past months. PMI & Related Supply Chain Reports: www.instituteforsupplymanagement.org/Resources/index.cfm?SSO=1
Sources: www.tspallocation.com/how-to-determine-the-business-cycles-current-phase/ & www.tspallocation.com/tspresources/#indicators
Disclaimer: This information is only for educational purposes. Do not make any investment decisions based on the information in this article. Do you own due diligence.