Recession Calls Still Wrong
Todd Sullivan | Mar 13, 2017 12:41AM ET
Vehicle Sales were released last week at 17.47mil SAAR (Seasonally Adjusted Annual Rate). Employment reports released today were higher than the average forecast. The Household Survey Employment reported 152,528,000, 447,000 than last month’s report. It is the trend which is important when analyzing this data. This report implies we have exited the industrial recession caused by 2yrs. of strong US$, which forced US industrial corporations to down-size. Future reports are required to confirm this. Yet, once again pessimists are calling for a major correction while economic activity continues to expand.
Prominent forecasters believe the recent rise in market prices are due for a significant correction which they believe will lead to a significant economic downturn. The reverse is what we historically experience, i.e. economic activity drives market psychology which in turn drives market prices. Expanding economic activity has always driven markets higher as investors were drawn into being increasingly more optimistic as previous expectations proved too pessimistic. The same condition exists today.
Forecasting the direction of economic expansion is relatively simple. The best overall indicator historically in my opinion is the T-Bill/10yr Treasury rate spread. The chart from 1953 shows the correlation between the rate spread an recession periods.
Every instance the T-Bill/10yr Treasury rate spread narrowed to 0.0%, but one, a recession ensued. The single instance when a recession did not occur was in 1966 as shown by the SOLID ORANGE ARROW. Market corrections did occur in every instance. If one reviews why this simple relationship is an effective economic/market indicator, one quickly comes to understand that lending institution lending profits are dependent on their cost of funds vs. lending returns for which the T-Bill/10yr Treasury rate spread is a proxy. Expanding lending activity drives economic expansions. A widening T-Bill/10yr Treasury rate spread drives lending activity. When the T-Bill/10yr Treasury rate spread narrows to 0.0%, lending activity slows markedly and over-levered businesses succumb rapidly as economic activity slows. Economic corrections are short but painful. Often corrections have lasted less than 2yrs. Short corrections have followed even when the prior expansion lasted 10yrs+. It is investor pessimism which seems to linger in relation to the pain experienced in the last recession. Many investors believe they see the next recession around every corner like Chicken Little believing that the sky is falling.
Get The News You Want
The current T-Bill/10yr Treasury rate spread is widening and supports future economic expansion. Even the most die-hard of pessimists will be forced to shift their perception towards a more optimistic stance as economic activity continues to prove them wrong. Eventually, economic activity will result in the T-Bill/10yr Treasury rate spread approaching 0.0% as optimism becomes too strong. For now, economic expansion is likely to continue for several more years with higher equity prices reflecting the gradual transition in market psychology from a position of substantial pessimism to one that is mostly optimistic.
It remains a good time to add capital to equities.
Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.