In yesterday’s post, we discussed the importance of the S&P 500 as a leading indicator of recessions in the U.S.
“The problem with making an assessment about the state of the economy today, based on current data points, is that these numbers are “best guesses” about the economy currently. However, economic data is subject to substantive negative revisions in the future as actual data is collected and adjusted over the next 12-months and 3-years. Consider for a minute that in January 2008 Chairman Bernanke stated:
‘The Federal Reserve is not currently forecasting a recession.’
In hindsight, the NBER called an official recession that began in December of 2007.”
My friend David Stockman from Stockman’s ContraCorner (a must-read site) sent me an email on Thursday morning stating:
“On your topic of today regarding recession recognition, here’s another point about after-the-fact revisions. NF payrolls were revised down by about 500,000 per month during the September-February 2008 plunge:”
The point here is that while CURRENT economic data points are positive, there are numerous ancillary data points which suggest the economy is already weakening. My colleague, Richard Rosso, sent me this note on the Fed’s alternative GDP calculation called GDP Plus:
“GDPplus is the Federal Reserve Bank of Philadelphia’s measure of the quarter-over-quarter rate of growth of real output in continuously compounded annualized percentage points. It improves on the Bureau of Economic Analysis’s expenditure-side and income-side measures. Currently, it is showing GDP at 4.0% annual growth with both GDI and GDP-Plus running at 2.0% or less.”
Historically, when GDP has deviated above both GDP-Plus and GDI, GDP has eventually “caught-down” with the rest of the data.
Currently, it is currently believed that the U.S. can remain an island of economic growth in a world struggling with weakness. As shown in the Ned Davis Research chart below, recession risk on a global scale has now surged above 70.
What does that mean?
“Readings above 70 have found us in recession 92.11% of the time (1970 to present). Several months ago, the model score stood at 61.3. It has just moved to 80.04. Expect a global recession. It either has begun or will begin shortly. Though no guarantee, as 7.89% of the time since 1970 when the global economic indicators that make up this model were above 70, a recession did not occur.” – Stephen Blumenthal
As we discussed yesterday, the dynamics of the market have now changed in a manner which suggests that “something has broken” in both the outlook for the economy and earnings.
While we have had corrections in the past, those corrections have not violated important long-term trends which have remained solidly intact since the 2009 lows. However, this past week, those violations began to occur. Over the long-term, trends are important to consider. The chart below shows the market versus a 75-week moving average. During bullish trends, the market trades above that average. During bearish trends, it’s the opposite.
With the market starting to violate that long-term support, it is worth paying attention to the risk of the market currently.
However, this does not mean you should “panic sell” the market currently. So far, this has been an expected, while painful, pickup in volatility as we discussed in our weekly missives. Most importantly, while the risks of a more meaningful mean reversion are rising, the market does not historically go straight up or down. Therefore, the change of the market’s tone from bullish to bearish does change the trading backdrop from buying dips to selling rallies.
Use rallies to reduce risk, rebalance portfolios, and raise cash for whatever happens next. If the market stabilizes, there are lots of great companies on “sale” currently. If the market declines further, you will appreciate the reduced volatility.
Just something to think about as you catch up on your weekend reading list.
Economy & Fed
- Trump’s Views On Trade Are Infiltrating Foreign Policy by Caroline Baum via MarketWatch
- Tariffs Caused The Crash In 1929 by Michael Markowski via BullsNBears
- Last 2X Economy Was This Strong, A Recession Came by Lakshman Achuthan via ZeroHedge
- Our Easy Money Economy Is Not Sustainable by Carmen Dorobat via The Mises Institute
- Europe’s Rattling Political Power PLays by Simon Constable via Korn Ferry Institute
- 8-Reasons A Financial Crisis Is Coming by Mike “Mish” Shedlock via MishTalk.com
- Caterpillar’s Tanking Stock Shows Risk To Trump Boom by Josh Barro via Intelligencer
- Empowering Harmful Polices At The Fed by Edward Woodson via Washington Post
- Are Tax Cuts Paying For Themselves? by Tim Fernholz via QZ.com
- America’s Inflation Risks by Stephen Roach via Project Syndicate
- Fed’s Restrictive Chatter Rattles Stocks by Ed Yardeni via Yardeni Research
- If There’s A Recession, Will It Be Trump’s Fault by Scott Sumner via The Money Illusion
- Breslow: The Market Has Disengaged From The Real World by Tyler Durden via Zerohedge
- An Overview Of Markets & Economic Growth by Joe Calhoun via Alhambra Partners
- Why Stock Prices Could Be Higher In 6-Months by Mark Hulbert via MarketWatch
- Market Says 2019 Growth Estimates Are Still Too High by Bob Pisani via CNBC
- The Black(Rock) Canary In A Coal Mine by Macromon via Global Macro Monitor
- Back To Trading Basics by Dana Lyons via The Lyons Share
- The Glaring Problem For U.S. Shale by Nick Cunningham via OilPrice.com
- Another Nasty Drop In S&P 500 Coming by Mark DeCambre via MarketWatch
- Is There More Trouble Ahead For Stocks by Jeffrey Kleintop via Charles Schwab
- America Is Not An Island by Kevin Muir via The Macro Tourist
- Would You Be Prepared For A 5700 Point Drop by Nigam Arora via MarketWatch
- “Unlimited Downside Risk” by JC Parets via AllStar Charts
Most Read On RIA
- Is The Market Predicting A Recession? by Lance Roberts
- Higher Rates Are Crushing Investors by Michael Lebowitz
- The #MAGA Market Trendline Is Broken by Jesse Colombo
- An Open Letter To Larry Kudlow by Doug Kass
- Average Stock Is Overvalued: Between Tremendously & Enormously by Vitaliy Katsenelson
- Fed’s Survey Of Economic Un-Well Being by Richard Rosso
- An Investor’s Desktop Guide To Trading by Lance Roberts
Research / Interesting Reads
- JPM: Expect $7.4 Trillion In ETF Selling In Next Downturn by Tyler Durden via ZeroHedge
- The Big Blockchain Lie by Nouriel Roubini via Project Syndicate
- What’s Wrong With 2% Inflation Target by Paul Volcker via Bloomberg
- Inside S&P 500, Most Stocks Already In Correction by Noel Randewich via Reuters
- Real Retirement Crisis Is High Cost Of Low Risk by Allison Schrager via Quartz
- Deutsche Bank: After The Pullback by Deutsche Bank
- Siegel Vs Shiller: Is The Market Overvalued? by David Hay via Evergreen Gavekal
- The George Costanza Portfolio by Cliff Asness via AQR Capital Management
- TSLA: Every Trick From Every Fraud To Put Lipstick On The Pig by Adventures In Capitalism
- Not All Corrections Become Bear Markets by Sue Chang via MarketWatch
“Markets are constantly in a state of uncertainty and flux and money is made by discounting the obvious and betting on the unexpected..” – George Soros
Questions, comments, suggestions – please email me.