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Preparing For A Bear Market And Recession In 2020


  • This is a weekly series focused on analyzing the previous week’s economic data releases.
  • The objective is to concentrate on leading indicators of economic activity to determine whether the economy is strengthening or weakening, and the rate of inflation is increasing or decreasing.
  • This week we examine construction spending, the ISM and PMI Manufacturing Indices, the ISM and PMI Services Indices and the jobs report for February.
  • A bear market and recession are upon us.
  • This idea was discussed in more depth with members of my private investing community, The Portfolio Architect. Get started today »

Construction Spending

Construction spending rose an impressive 1.8% in January, and December's decline of 0.2% was revised to a gain of 0.2%. Non-residential spending finally joined the party after five monthly declines, rising 1.6%, while residential spending was up 2.0%. This puts residential spending up 9.2% over the past year and non-residential up 5.1%. All we need now is a nationwide infrastructure plan, but I'm not sure how we would pay for it. Still, this will be a positive contributor to growth in the first quarter.

PMI and ISM Manufacturing Indices

A softening in new orders to a nine-month low with overall growth at a six-month low led to a decline in IHS Markit's Manufacturing Index (PMI) in February to 50.7. That was down from 51.9 in January. Confidence levels from survey respondents surged to the highest level since April 2019, which was clearly a result of the phase-1 trade deal, but I expect that to be short-lived with the coronavirus concerns taking center stage. The virus was noted by several respondents as leading to supply chain issues. That will be a more pronounced concern in the next report, and I expect the survey to show contraction in March.

The Institute for Supply Management's Manufacturing Index slid back to the flat line of 50.1 in February from January's brief spell of growth at 50.9. Again, as trade tensions are diminishing, coronavirus concerns will take over. We can expect a significant drop in this survey for March. The Imports and Prices sub-indices plunged, while the New Orders sub-index fell back into contraction. .

PMI and ISM Services Indices

Last month I warned not to get too excited about the jump in IHS Markit's Services Index to 53.4 in January because the survey was completed pre-coronavirus. That turned out to be sage advice, as

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This article was written by

Lawrence Fuller profile picture

Lawrence Fuller has been managing portfolios for individual investors for 30 years, starting his career at Merrill Lynch in 1993 and working in the same capacity with several other Wall Street firms before realizing his long-term goal of complete independence when he founded Fuller Asset Management.

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Comments (67)

More like a repeat of 1929
Chase will be damaged but will recover nicely whenever rates rise.
The real point of your analysis that people are overlooking is oil - that is going to whack some financial institutions quite a bit for shale loans and will have an effect on the velocity of money. It also bodes quite well for the gold miners as they will start seeing the decrease in energy costs as mines are fairly energy intensive. Also, probably on oil tankers as they "sit" in storage in the middle of the ocean from the glut. It just came to light that Italy is completely shutdown so prepare for even more volatility...
Lawrence Fuller profile picture
@axxis777 Agree, the market went down today because of oil, not the virus. The big banks crushed.... huge loan books to energy. JPM leads the pack.
ErpichtAuf profile picture
We may be on the verge of entering bear market territory, but we have a while to go before a recession is declared.
DividendGems profile picture
Recessions are always declared after the fact for obvious reasons. In other words, economic contraction may have already started. I think the March job numbers will start to tell the story.
nyckingo profile picture
@Lawrence Fuller- great piece..I'm sitting on 90% cash and 10% stocks that are grade Bs anyway. When SPX hits 26xx - was thinking of starting to buildup with some of these ETFs IQLT, DNL, MGC, QUAL, SCHD, VV, CZA, QLTA, EMB, HYD- what do you say?
Lawrence Fuller profile picture
@nyckingo I think at 2400-2500 anything that is bought will make money a few years later, but I prefer individual stocks that i know.
Thanks for article. One question only - should I close all positions tomorrow (PFF, PFXF, RQI, RFI, etc.)?
Lawrence Fuller profile picture
@leonya complicated question.... we are going to collapse tomorrow down 7% at most before a halt in trading, unless there is a Fed savior before the open. I've done all my risk reduction well in advance of this... I don't like selling into panics.
Excellent data and commentary,thanks Lawrenec.
Lawrence Fuller profile picture
@katmandu100 Thanks for regularly reading.
DividendGems profile picture
@Lawrence Fuller

When I look around SA at the authors proposing now is the time to buy the market, most look rather young. They probably started investing within the last 10 years. They've read about recessions and bear markets, but books can't teach lessons as well as experience.
Lawrence Fuller profile picture
@RedFalcon I've thought about that a lot lately, that's a great point. People look back and 2000 that were'nt living it and say, snooozzzzz Big deal. I remember writing down on a note pad (we didn't have iphones back then LOL) how many days in a row the Nasdaq went down. It was like 68 check marks. It was amazing, just relentless unwinding of leverage and forced margin call selling. That was a corporate recession, much like I think this one is going to be. The consumer was no where near as hurt, unless they were loaded up on tech stocks.
DividendGems profile picture
@Lawrence Fuller

I think this event will lead to significant job losses. Restaurants operate on thin margins. It won't take much of a drop in traffic for them to feel the pain. I haven't seen any data, but cruise bookings have probably fallen off a cliff, same for foreign leisure travel.

There will be a ripple effect.

The only industries benefitting will be those selling "prepper" products.
DigDeep profile picture
2000 & 2008 markets were below the 200 day MA and sinking. We're in a rising 200 day currently - testing support levels as we go.
CV, imo, will drop off the front pages fairly soon and 99.9% of the country will move forward and resume a strengthening economy - it's in our nature.
Lawrence Fuller profile picture
@DigDeep The oil price war that erupted today could be a new disaster waiting to happen for US Shale. Russia wants to put us out of business and the Saudis want to punish Russia. This could be worse than 2016 for the US oil industry. The debt defaults start the ball rolling. Huge job losses. ON top of that we have the virus hitting US consumer and corporations.

Wells Fargo just announced no travel international OR domestic for all employees moving forward. If half the companies in the SP do that you have a recession right there.

Its been 12 years of bliss, built on a mountain of DEBT. The DEBT is about to come home to roost! I think we are lucky if we see only 2500 on the SP this summer, and that would be 15x consensus estimates of $172. And that's without cutting estimates, which are going to come down significantly.
DigDeep profile picture
@Lawrence Fuller Why will it 'come home to roost' as you say?
If it's the "walking dead" scene for CV, yea we'll tank. I don't see it playing out with the worst case scenario. 99.something% of americans aren't in a hot spot and are leading normal lives. Handshakes are down and people are aware to self quarantine.

I've got confidence in Americans and most of the world to act in their self interest, protecting ones self and vying to improve 'their station'
-- just like we have done .... we've overcome every virus, flu, war, terrorists attacks, etc.

We've entered a period similar to when the boomers entered their peak earnings years in the early 80's. The first batch of peak earnings age for millennials has started. The good news is that there's 10 million more millennials in the same age group.

The 35+ up bread winners will do everything/anything possible to further their families position. I think folks don't take into account the ability of young chargers to make something happen. They have houses to buy, diapers to buy, etc

A doomsday outlook doesn't account for the natural surge from bread winners to succeed....and they'll look beyond CV and leave it in the dust in their quest to succeed.
Lawrence Fuller profile picture
@DigDeep What I'm talking about is the leverage in the economy/market coming home to roost when we see economic activity slow/contract and revenues/profits with it. I've got friends in private equity that tell me how many companies are levered and don't have the cash flow to service if we see a downturn in the economy. That's where the wheels fall off. Debt downgrades lead to an increase in cost of credit, regardless of what Fed does, and defaults rise. Its the tip of the iceberg. Layoffs begin, and its a snowball. The energy industry will lead the way.
DividendGems profile picture
The canceling of SXSW is what slapped me in the face and pushed me to realize this event will impact the economy. Austin cancels the biggest annual revenue generator for the city when Texas has fewer than 10 diagnosed cases. We're only seeing the beginning of economic disruption.
crockejo profile picture
Exactly. Just getting started here. Italy shutting down. We might be past the point where it could have been contained anyway. We will figure out how to deal with this virus better in the coming weeks but so far the US CDC and HHS have not been doing the best job of taking preventative measures, and the politicians more worried about keeping the economy going in an election year. That will all change in the next few days as we come to grips with the situation I think.
Bilhelm profile picture
Right. Let's also not forget the incompetence (we seem to have been caught flatfooted) and mendacity that complicates our practical and behavioral responses to CV-19. It will work itself out, but it will be a bumpy ride.
When i was a growing young man in late 70s to 1980s, there were far too many oracles predicting the End of the World as we know it.

Cold War and World War III were my most feared predictions, exacerbated by Ronald Reagan brandishing SDI challenging the USSR and Red China to make the first move. Rich people started digging Improvised Backyard Nuclear Shelters all over the world in anticipation of ICBMs raining down any time soon. I was penniless back then so i just accepted my fate - life goes on until it doesn't.

* prediction. ... So a prediction is a statement about the future. It's a guess, sometimes based on facts or evidence, but not always. A fortune teller makes a prediction using a crystal ball. A meteorologist uses maps and scientific data to tell us about the possibility of rain, snow or sunshine.

Nobody i know was able to accurately predict the future.


Unfortunately for oracles, wizards, economists and financial analysts; news events were always different each time for decades and centuries already. Hence, impossible for them to succeed in 'correctly' predicting the future because what will happen in the future would always be different from what happened in the past and from what's happening right now.

- always Different This Time: drive.google.com/...

- FUD Investors Club: staticseekingalpha.a.ssl.fastly.net/...

The best thing reporters and mass media including economists and financial analysts can do is to keep repeating same-old same-old 'predictions' of recessions and bear markets over and over again no matter what is/are the reasons - because there are dozens to hundreds of news events everyday all over the world. With enough practice, practice, and more practice they can make it look like each and every bad news equivalent to 'The End of the World' as we know it - click bait as we know it these days in internet terms.

And because unlike exogenous events or black swans that were always different from each others - recessions and bear markets are practically the same.

* recession: a period of temporary economic decline during which trade and industrial activity are reduced, generally identified by a fall in GDP in two successive quarters.

* bear market: stock prices drop 20% or more /Dow Jones.

Therefore: It's not the End of the World - Life Goes On.

Life is short: Count our Blessings while we can.
Well said.

The C-virus is getting these permabears excited that their constant call for an anti Trump recession might actually come true this time. IMHO
crockejo profile picture
Let's see how it goes. With the vix above 40 this is not the time to dip your toe back in and buy stocks.
Gary Jakacky profile picture
Don't forget..pay attention to what investors/analysts DO, not what they say. There is still fairly strong Call buying in the major index ETFs (no one wants to miss the "rebound..."); breadth continues to deteriorate; and transportation stocks, always a good leading indicator, are far weaker than the rest of the market.
Thanks for the great data, but there's nothing significant in the data that leads to the dramatic conclusion of "two quarters of contraction".

If gain in jobs is due to residential construction, as you pointed out, so after the latest rate cut it supposed to surge even more.

Current GDP estimates for Q1 are around 2%, and its 3 weeks before the end of Q1.
Even if US follows Italy in virus spread, not sure if these 3 weeks could bring current 2% to minus figures (contraction).

I will be not surprised to see 2% Q1 print.
brianklu profile picture
Always a voice of reason !...Thank you......don`t test don`t tell
This is a great time to buy Gold and hold on to it.
Corona and Bitcoin
Milk and Cookies
stumpy58 profile picture
Great article, thank you.
Well received logic that struck a chordant note with me.

We will pay the price of misplaced priorities and easy way out decisions made over the last several decades.
Among these is American management's preference for cheap foreign slave labor that is oh - so - easy to deal with.
Problem is, it puts us at the mercy of communist and other dictators that can and will manipulate their new advantages for their own purposes that are not consistent with ours.

The supply chain of pharmaceuticals is already being disrupted, to add to the problem that their efficacy and purity has never been fully trusted.
Stores are filled with shoes and apparel that even peasants would not wear in their own country, and now we will have trouble getting even that.
We have built them up to become our masters, and now the price is starting to be paid.
It took a long time to get to this state of affairs, and it will take a long time to work our way out of it, but only if we start now, - and it is way past time.
Agree on all accounts.
crockejo profile picture
Agree. Crazy that 95% of us antibiotics and most other pharmaceuticals produced by the nefarious CCP and Chinese. And that the US and most of the West outsourced to China. Short term thinking by greedy corporate C-level execs. I guess the stock buyback scam / rules don't help reward longer-term thinking.
DividendGems profile picture

What happens if we go to war with China? Besides the impact on exports, everything that comes from that country stops. Would a depression be avoidable?
TrihawkJon profile picture
Sound reasoning.

Hard to believe SA authors are actually saying “this time it’s different”, and that we should all being buying the dip right now, with titles like “Time To Buy The Coronavirus Stock Market” and “The Melt-Up In Stocks To Come”. The market has fallen quickly, but articles that use the word “boogyman” as if people old enough to run a self-directed portfolio are children afraid of the dark are misguided at best and irresponsible at worst.

Yes, there is a mindset for some that posits Total Return as irrelevant, that income is the only thing that matters, and for some investors (including me), that may be true... but only up to a certain point. I can take a 10% hit without losing sleep over it, but 70%? No. And 70% might be in the cards we’ve dealt ourselves over the years. What happens when multi-year supports get broken on REITs, BDCs, and CEFs? What happens when the financial markets seize?  

When I sell or buy a stock, bond, or any financial instrument, money does not leave or enter the market, because each transaction has two sides. There is no “money on the sidelines”. That is a myth. The only transactions that create or destroy are IPOs, new issues, and Fed interventions. Which means that when the markets go down, somebody always takes the hit, and this time will be no different than all the other times.

Up until now I’ve been selling my extra-weak and extra-risky holdings and just holding on to the others, which means I’m down about 9% from the all time high I hit late last month. At this point a lot of my investments are sitting right smack dab on support. So for me, this is the inflection point; they either hold or they don’t. If they don’t hold, most of what I hold have nothing but air underneath, and the bottom’s the limit. I suspect that most will not hold, and I will have to drastically shrink my holdings to preserve capital. I probably won’t sell everything, but I won’t be buying either.

And if they all turn around and come roaring back, well great! I just wouldn’t count on it. A dead cat bounce is certainly plausible here, and it might even last several days. And I could be COMPLETELY wrong; this might be the start of a sideways market, but I wouldn’t count on it. This is where technical analysis pays off. Watch your charts people, and look up “longterm support” on Investopedia if you have to, to see what it looks like, but whatever you do, now is not the time for wishful thinking.
I think BDC, CEF, and some REIT holders are going to be shocked where they sit in 5 years.
Lawrence Fuller profile picture
@TrihawkJon Thanks for the thoughts, I'm thinking 2850 is tested again, if it wasn't already on Friday before the power hour melt up the last hour of trade, but then we break below and find a bottom in the 2400-2500 range later this year. That's where I would get more aggressive at adding risk.

I also think the "hunt for yield" crowd are in for a rude awakening. The decline in Treasury yields has been a boom for the yield hungry in total return, but that cuts both ways and long-yields below 1% spell big trouble. Friday was the first day that spreads widened meaningfully. Buying that dip will be the biggest mistake of them all in my opinion.
dsorchestra90 profile picture
Great article and reply. I just want to add as a watch note I believe the 200 week moving average around 2,635 currently, has held every sell off post crisis. I think that is a test level to watch. As you indicated the intro day feb 28 low of 2,855 level is the one to watch in the immediate term.
We are in for some serious problems. The WHO and CDC have been warning people for months now. All warnings fell on deaf ears. Anyone that thinkals this is "just like the flu" is only putting their ignorance on display. When was the last time a first world nation like Japan and Italy closed down their ENTIRE education system for 6 weeks over the flu? The closest comparison we have to this situation is the Spanish Flu of 1918. I doubt this will be as deadly as that due to reason including free flow of information and advanced healthcare expertise, but anyone not taking this seriously has their head in the sand. We will likely see a spike in cases in the US in the next 2-3 weeks. Our governmemt should have had test kits everywhere in every state weeks ago. To date the US has only tested 2000 people. South Korea tested 12000 people in the first WEEK and 150,000 people to date.
Lawrence Fuller profile picture
@Orion Pax Roosevelt I agree with your assessment. The US gov't seems more concerned about the stock market and fear of people taking precautions that may slow the economy. Larry Kudlow said as much on Friday morning, only to be demoralized by the CNBC hosts.

I suppose if you don't test anyone then you can say that there are only 250 cases of the virus in the US. The poorer segment of the population is most at risk because they won't go to pay to be tested, or tested at all even if it is free. I think we will see 1000s of cases, and as you mentioned, when the death rate is close to 15% for the oldest segment of the population, it will shut down a lot of economic activity until this is confronted head on.
Lawrence Fuller profile picture
For these reasons, I think it is foolhardy to "buy the dip or bounce," as so many are suggesting. This could last months, and to think it will be a Q1 event is ridiculous. It may wipe out EPS growth for the year, which was only 6% pre-virus. Who wants to pay 20x for the market with that much uncertainty. As I mentioned, my real concern is the the DEBT that we have in this economy (gov't, corporate, consumer) is going to rise to the top of concerns the longer this lasts. You can't service debt when you have no revenue growth.
Goomba69 profile picture
You can service debt when the government pays you to borrow. Greenspan said negative interest rates in the US are coming even before coronavirus.
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