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Global Economic Downturn Continues to Intensify

|Includes: DIA, QQQ, SPDR S&P 500 Trust ETF (SPY)

It remains highly likely that the US economy is on the verge of a new recession as global leading indicators continue to signal that the largest developed economies around the world are beginning a synchronized contraction. In his latest weekly commentary, fund manager John Hussman reviewed data from the Organization for Economic Cooperation and Development (OECD) that support the global recession scenario.

…the chart below presents data (through October) from the Organization for Economic Cooperation and Development, an international quasi-governmental agency that sets international standards on a wide range of economic policy issues. The OECD publishes its own set of leading economic indicators on developed and developing countries. Notably, we’ve never observed deterioration to the extent that we presently observe, except when the U.S. was in or entering a recession.

The chart below is somewhat noisier, but conveys what we observe internationally – a concerted global economic downturn is unfolding here – not simply one or two countries. I should note that the China figures from the OECD typically run much higher than other nations around the world, so they are plotted on the right scale. But even there, the growth rate has dropped to levels that are consistent with a concerted global economic downturn. The composite (“Total”) signal has never been at present levels outside of recession. The uniform downturn in these indices (including China on an adjusted basis) is difficult to align with the concept that the U.S. economy faces a near-term expansion.

The OECD leading indicator trends align closely with our own computer models, which have been suggesting the highly likely start of a recession since September. As usual, stock market behavior provided the initial warning of impending economic weakness when the topping pattern that developed during the first half of 2011 experienced a violent long-term breakdown in early August, signaling the probable formation of a bull market top in late April. It remains highly likely that a cyclical bear market is in progress from May, although we await one final confirmation that should be provided sometime during the next six weeks. The S&P 500 index will likely experience losses of 30% to 50% during the next 9 to 18 months before the next cyclical low forms in late 2012 or early 2013, so we will remain fully defensive until market behavior indicates that the next long-term bottom is developing.

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