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Recession Watch – What to Look At

Recession Talk

We are currently in an expansion. That expansion will continue until something breaks it…a recession. Recessions cause bull markets to turn into bear markets. No one wants to see a recession or a bear market.

Recessions are caused by specific variables. They do not start just because we have not had one for a while or because we are due for one. It doesn’t work that way.

Expansions don’t operate on “borrowed time”. The current expansion, which is generally agreed upon to have started in June of 2009, is the third longest on record. Only the economic expansions that started in February of 1961 and March of 1991 have lasted longer. Simply put, age is not a factor. I guess you could argue that every day an expansion continues, it brings us one day closer to the next recession, but that’s a lot like thinking every morning we wake up brings us one day closer to our ultimate demise.

Stock market corrections are not a cause of recessions, either. Volatility simply does not cause recessions. Consider the chart below from JP Morgan. The red dots are the intra-year declines for each calendar year. The grey bars show the actual calendar year return of the S&P 500. While there are no recession bars, it’s easy to see that almost every year has a significant decline.

Intra-Year Declines in Stock Market
What about the factors that cause recessions? I’ve often written about three things that are worth paying attention to for the big picture: overborrowing, overspending and overconfidence. After my last blog I had a request to post data and charts that support my feeling that we are not experiencing these “overs”. In an effort to keep this from becoming a lengthy research report, I’m going to simply list the reports or indicators that fall under each “over”.

  1. Overborrowing
    1. Business Debt
    2. Commercial Loan Growth
    3. Credit Card Debt
    4. Consumer Debt Payments
  2. Overspending
    1. Commodity Prices
    2. Business Spending
    3. Durable Goods Orders
    4. Home Prices
  3. Overconfidence
    1. Conference Board’s Consumer Confidence Survey
    2. Stock Market Valuation Measures
    3. Wage Growth
    4. Leverage in Businesses

While we track these internally, Burt White from LPL Financial looks at the same data and does a really nice job of taking the above components of each “over” and normalizing them into an index that scores them. Frankly, I keep up with this chart as a component of our internal dashboard. This one, last published in December, overlays the scores and recessions. It shows me that there is not a huge risk of recession around the corner – look at the level today versus the 3-year and 1-year score levels prior to a recession.

Over Index Recessions

Right now, the financial markets seem to be in a fight between a solid global economy with accelerating growth and geopolitical risks, which has led to recent increased volatility and a range bound market with no direction.

There will always be something going on – but there is a ton of good:

  • Last month we added 300k new jobs in the U.S.
  • Consumer Confidence is at a 14-year high
  • Industrial production is strong
  • Tax reform is increasing corporate profits and capital spending

Keep looking forward – Dave


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David B. Armstrong, CFA

President & Co-Founder

Dave got into the industry when he discovered his passion for finance in his mid-20’s. He’s a combat veteran and served as an officer in the United States Marines Corps on both active duty and in the reserves, retiring at the rank of Lieutenant Colonel. While serving on active duty, Dave was unable to spend money on deployments, so he became a self-taught investor. Along with a few bucks cash as a bouncer, his investing performance grew to be good....

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