Forecasters See A Bear Market Till Mid-2009

Leading economic indicators and stocks are on a collision course. The recent rally suggests the bear market has bottomed but recent readings for leading economic indicators (LEIs) suggest the recession will be a lot longer and deeper than what the market seems to be expecting.

Indeed, the LEIs are beginning to suggest the recession will be at least as long as the 16-month downturn in 1981-1982. If they are right and the S&P 500 bottoms two to four months before a recession ends, then the current bear market will likely continue until mid to late 2009 (assuming the current recession began July, 2008).

What are the LEIs saying? Let’s focus on the 40% decline in the Journal of Commerce Industrial Commodity Price Index since its high in July. That’s the “most since 1949 and worse than the declines before every recession since then,” said Bloomberg.

The collapse in the index shows a collapse in the manufacturing sector. “The industrial sector, which was helping to keep the recession relatively mild, has completely given way and now we need to be prepared for a much more severe recession,” said Lakshman Achuthan, managing director at the Economic Cycle Research Institute, which compiles the Journal of Commerce data. “It’s at least going to look something like what we saw in the early 1980s, but it could be worse.”

The Bloomberg article adds: “The commodity decline coupled with economic data signal the current slowdown will last at least 16 months and spur slowdowns globally, not just in the U.S. and Europe, ECRI’s Achuthan said. The slumps of 1990 and 2001 lasted eight months, according to NBER data. ‘As is usually the case, the commodity index is ahead of consensus right now and indicating just how deep and how long this global recession will be,’ Achuthan said.”

ECRI has one of the best forecasting records within the economics fraternity, in my opinion. It was founded by Geoffrey Moore, father of LEI analysis (and professor to Alan Greenspan). “ECRI is perhaps the only organization to give advance warning of each of the past three recessions; just as impressive, it has never issued a false alarm,” said the Economist magazine back in 2005.

Comments

[herbert hoover:]

Homeprices are falling. Consumer confidence is dropping. The Fed is supporting half the financials but the DOW goes up!!!!!!!!!! LOL.

Keep buying suckers.

2008 Nov 05 03:31 PM

[Smarty_Pants:]

"Forecasting" is a good way to lose money.

It is a bear market. Expect Bear Market type stuff to continue until it stops we see a Bull Market begin.

We ain't there yet, so take forecasts of the Bear's demise with several grains of salt.

2008 Nov 05 04:32 PM

[sr9web:]

best to sell the bounces and buy only the very deep dips for a least the next 3-6 months

2008 Nov 05 05:08 PM

[whidbey:]

ECRI does great work, however, they are good at location of turning points, not magnitudes or durations, both of which assume lives of their own once underway.

Much of what happens next seems to turn on the final consumer. We think he is tapped out, and if he is our down cycle becomes unpredictable. The so-called safety nets, unemployment insurance public expenditures and inventory cycles may not kick in so quickly. The Treasury sales coming up will drive interest rates up and sop up cash in savings. It looks very shaky to me.

2008 Nov 05 07:07 PM

[waf76:]

the market never goes up in the summer so i dont see how its a bear market until mid-2009. bull run 1 year from now is more likely, if we are lucky...

2008 Nov 05 07:33 PM

[Sharp45:]

A 2009 bull market? Growth will never be the same without insanely-loose credit. Where will the spending for a recovery come from? People are tightening their belts, and it's not a temporary thing. Our lifestyles have to change, and it's gonna be ugly combined with all the other factors (like $51 trillion in unfunded government liabilities).

If recovery means getting back to 2007 highs, that seems unlikely in the next 5 years, maybe 15. Stimulus packages and bailouts may allow the pipe-dream to continue a little longer. But confidence is broken, corporate responsibility is out the window.

2008 Nov 05 09:33 PM

[Steven Hansen:]

the author has confused a bear market with the economy. i think what he is trying to say is that historically the market begins a recovery within six months of the end of a recession. if you want to use historical data on predicting the end of a bear market, the end would be somewhere between 2013 and 2015 depending on where you spot the beginning.

also please note what whidbey, waf76, and adam sharp has said.

2008 Nov 05 11:47 PM

[flow5:]

try 2nd qtr 2009

2008 Nov 06 10:44 AM