Imagine having access to an indicator that has reliably predicted recessions with high accuracy for almost a century. Surprisingly, there is an indicator that has done just that, without receiving much mainstream attention.
This indicator was recently tallied at the end of February, so what does it say? Interestingly, the indicator’s reading contradicts the predictions of other signals that suggest a lingering bear market.
Let’s delve deeper into the background of this powerful indicator and examine the accuracy of its predictions.
Twelve bear markets in history ended with varying recession periods lasting between 2 and 18 months. The negative sentiment from a bear market usually affects investor decisions leading to risk-averse trading. There is a general decline in demand for securities, and stock prices drop as a result. Essentially, bear markets reinforce recessions and vice-versa through slowed-down economic activity.
- A powerful indicator has reliably predicted recessions for almost a century. The indicator suggests that the current bear market may not result in a recession, and a market recovery may be on the horizon.
- However, other indicators such as the Shiller price-to-earnings (P/E) ratio or the cyclically-adjusted P/E ratio (CAPE) carry warning signs and suggest a potential decline in share prices.
- There is ambiguity in the definition of a recession, and poor manufacturing performance in recent quarters raises concerns about a potential recession.
Interestingly, each bear market in the past bottoms out through the same process. In each case, a bear market bottom only happened after an eight-economist committee from the National Bureau of Economic Research (NBER) declared the start of a recession.
Ed Clissold, the chief researcher of Ned Davis Research Group, tweeted that bear markets start a median of 6 months before a recession, with the longest being 17 months in 1956 and 1958. Based on Clissold’s presented figures, bear markets bottom with a median of 5.3 months and an average of 5.9 months.
A formal recession has not been announced yet by the NBER, but it may occur within the year based on past trend; the current bear market started in June 2022.
Clissold’s research shows that there is a high possibility of a bear market without a recession. There is no precedent bear market that has lasted as long as the current situation if it pushes into late 2023 or early 2024.
Clissold stated, “as recession fears fade, the market enters a post-echo bull until the next recession. To date, the 2022 bear ~2yrs is close to the average echo bear. Perfectly normal cycle behavior!“
Bear Market Indicators
While the above indicator suggests a recession-free period and a market recovery in the near future, other trusted stock market indicators suggest otherwise.
For instance, the Shiller price-to-earnings (P/E) ratio or the cyclically-adjusted P/E ratio (CAPE) carries warning signs. CAPE bases readings on average inflation-adjusted earnings over the previous 10 years rather than conventional 12-month earnings. S&P Shiller P/E recently hit values above 30 in February, and according to historic records, these numbers usually lead to at least an eventual 20 percent decline in share prices.
Some individuals have pointed out that the very concept of a recession has changed in recent times, and the economy already faces a recession based on poor manufacturing performance in recent quarters. The Bureau of Labor Statistics shared that the manufacturing sector labor productivity decreased by 2.7 percent in the fourth quarter of 2022.
According to the NBER’s Business Cycle Dating Committee, a recession is defined as “a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in production, employment, real income, and other indicators. A recession begins when the economy reaches a peak of activity and ends when the economy reaches its trough.
So, while the stock market indicator discussed above suggests an incoming uptrend and recession-free period, it’s important to consider other reliable indicators as well. The economy is facing ambiguity in the definition of a recession, and poor manufacturing performance in recent quarters raises concerns about a potential recession.
It’s worth taking a cautious approach, reevaluating portfolio risk and considering protective measures against potential market volatility. Dollar-cost averaging and incorporating high-dividend stocks into portfolios are just a few strategies to consider during uncertain times.
It’s further noteworthy that no indicator can predict the market with complete accuracy. However, by being vigilant and staying informed about multiple indicators, investors can make informed decisions and mitigate risks during volatile market conditions.