No Recession Signaled By iM's Business Cycle Index: Update - March 5, 2020
Summary
- Knowing when the U.S. economy is heading for recession is paramount to successful investment decisions.
- Our weekly Business Cycle Index would have provided early reliable warnings for the past seven recessions.
- The BCI at 260.6 is below last week's level and is far from signaling a recession.
The BCI at 260.6 is down from last week's 262.3 and is below the previous high for this business cycle indicated by the BCIp of 89.1. Also, the six-month smoothed annualized growth BCIg at 9.9 is down from last week's 10.0.
Both BCIp and BCIg are not signaling a recession. (BCIp needs to drop below 25, or BCIg needs to drop to below zero).
Figure 1 plots BCIp, BCI, BCIg and the S&P 500 together with the thresholds (red lines) that need to be crossed to be able to call a recession.
The BCI was designed for a timely signal before the beginning of a recession and could be used as a sell signal for ETFs that track the markets, like SPY, IWV, VTI, etc., and switch into Treasury bond ETFs, like IEF, TIP, BND, etc. (see our article).
The BCI uses the below-listed economic data and combines the components for the index in "real time," i.e., the data is only incorporated into the index at its publication date:
- 10-year Treasury yield (daily)
- Three-month Treasury bill yield (daily)
- S&P 500 (daily)
- Continued Claims Seasonally Adjusted (weekly)
- All Employees: Total Private Industries (monthly)
- New houses for sale (monthly)
- New houses sold (monthly)
The six-month smoothed annualized growth rate of the series is a well-established method to extract an indicator from the series. We use this method to obtain BCIg, i.e., the calculated growth rate with 6.0 added to it, which generates, on past performance, an average 11-week leading recession signal when BCIg falls below zero. Further, the index BCI retreats from its cyclical peak prior to a recession in a well-defined manner, allowing the extraction of the alternate indicator BCIp, a measure of the fall from the peak, from which, on average, a 20-week leading recession warning signal is generated when BCIp falls below 25.
Table 1 lists the weeks lead to recession would have provided by the warning signal, when the BCIp and BCIg fell below the respective trigger levels, to the start of the NBER recession.
Table 1: Weeks lead from warning signal to recession | ||||
BCIp | BClg | |||
Trigger Level | 25 | 12 | 0 | 0 |
Recession of | Actual leads from historic data | |||
1970 | 22 | 15 | 12 | 13 |
1973 | 22 | 15 | 15 | 12 |
1980 | 20 | 15 | 14 | 12 |
1981 | 12 | 10 | 9 | 5 |
1990 | 26 | 26 | 14 | 14 |
2001 | 17 | 14 | 12 | 12 |
2008 | 22 | 20 | 13 | 9 |
Average | 20 | 16 | 13 | 11 |
In Table 2 we record for each recession the pre-recession peak of the S&P 500, the value on the day of the BCIg signal, and the subsequent lowest value of the inter-recession trough. From these, we calculate the loss avoided by exiting the market on the day of the BCIg signal.
Table 2: Loss avoidance in SPY when exiting on BCIg recession warning. | ||||||||
Note | 1 | 2 | 3 | 4 | 5 | 6 | 7 | 8 |
Recession | P eak | S ignal | T rough | (P-T)/P | (S-T)/S | (P-T) | (S-T) | (S-T)/(P-T) |
Jan-70 | 106.16 | 93.24 | 69.29 | 36.1% | 25.7% | 36.87 | 23.95 | 65.0% |
Dec-73 | 120.24 | 103.36 | 62.28 | 48.2% | 39.7% | 57.96 | 41.08 | 70.9% |
Feb-80 | 115.2 | 100.3 | 98.22 | 17.1% | 2.1% | 16.98 | 2.08 | 12.2% |
Aug-81 | 140.52 | 128.64 | 102.42 | 27.1% | 20.5% | 38.1 | 26.22 | 68.8% |
Aug-90 | 368.95 | 332.92 | 295.46 | 19.9% | 11.3% | 73.49 | 37.46 | 51.0% |
Apr-01 | 1520.77 | 1326.82 | 965.8 | 36.8% | 27.2% | 554.97 | 361.02 | 65.1% |
Jan-08 | 1565.15 | 1508.44 | 676.53 | 56.8% | 55.2% | 888.62 | 831.91 | 93.6% |
Average all recessions | 34.6% | 25.9% | 60.9% | |||||
| Column Notes:
| ||||||||
Following the signals from our recession indicator, one would have avoided on average about 61% of the total market decline from pre-recession peaks to inter-recession troughs as indicated in the last column of Table 2. One can see in column 5 that exiting the market at the signal dates would have avoided losses averaging about 26%. Had one known the market peak, one could have avoided the 35% average decline as shown in column 4. Prior to the last recession the exit signal from BCIg occurred almost when the market peaked.
The historical values can be downloaded from iMarketSignals as an MS Excel sheet.
Figure 2 plots the history of BCI, BCIg and the LOG (S&P 500) since July 1967, and Figure 3 plots the history of BCIp, i.e., 46 years of history, which includes seven recessions, each of which the BCIg and BCIp managed to indicate timely; the weeks leading to a recession are indicated on the plots.
This article was written by
Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.
Disclaimer: The information provided is based on a mathematical model using public available economic data, and is not biased by any opinions from ourselves or those expressed by others. The charts depict the results of our model and are not influenced by any other factors except the updated parameters which the model uses. You are cautioned that forward-looking statements, which are based on the model's past performance, are subject to significant geopolitical, business, economic and competitive uncertainties and actual results could be materially different.
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Comments (7)
Well, a lot can happen in 12 months, but fear has a way of making it seem like 12 days away!
