Will there be a global recession? We believe there is a high probability of a mild global recession. The economics suggest paying down debt, recapalizing, and austerity in the US, but more so in Europe leading to slow growth for years and a mild recession if the governments reduce their spending. However, we look at the probability of a recession using our behavioral indicators as opposed to viewing the economics.
We have a history of indicators for the US going back to 1970. Since 1970 there have been five dates that coorespond to what is occuring today. Those periods include 1971, 1978, 1986, 1994, and 2006. Let us take a look at each period and analyze what subsequently occured.
- 5/2/1971 our US indicator started to increase dramatically similar to 8/3/2011. The S&P 500 then went from 102 to 119 by 1/7/1973, which was a high before the 1973-1974 crash. It took one year and half from 5/2/1971 date for the market to crash.
- 9/10/1978 the US indicator started to increase dramatically. The S&P 500 was 104 at the time. On 2/3/1980 the S&P 500 was 118 before there was a minor recession. Almost a year a half before a recession.
- On 4/6/1986 the US indicator started to increase dramatically. On that date the S&P 500 was approximately 235. On 9/27/1987 the S&P was 330. Then the October 1987 crash occured. This was approximately a year and half from the onset of the increase in the measure.
- On 3/13/1994 our US behavioral measure increased dramatically. The S&P 500 was 464. On 7/30/1995 the S&P 500 was about 559.The S&P 500 kept increasing from there.
- On 4/30/2006 the US behavioral indicator increased dramatically. The S&P 500 was about 1300. On 10/21/2007 the S&P 500 was 1535. That was the weekly high before the financial crisis in 2008 and 2009.
In four out of the five periods it took approximately one and half years after the onset of the increase in our behavioral measure for the S&P 500 to reach a high and then for the stock market to fall. The only period that did not follow with an increase in the market over the year and half period and a subsequent fall was in 1994.
The onset of the increase in our US behavioral measure began at the end of July. Today we are at the end of November. Therefore, four months have passed. We have another year or so before any major fall in the US stock market if there is one. The upside is that in all five cases the US stock market increased over the year and half.
Out of all the five periods, which period resembles the US today? The 1978 period resembes today in the respect that 1973-1974 there was a stock market crash and then a rebound from 1975 to 1976, then a fall in 1977. The US stock market had a crash in 2008-2009 and rebounded in 2009 and 2010 and then fell in 2011. In that respect the cycles are similar. In 1994 we were in the midst of an internet bubble. Very different from today.
What do we suggest? We suggest slowly adding money back to ETFs such as SPY but then by 2013 we suggest being more cautious.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.