Two charts that update monthly are the “Global Recession Probability Model” and “The Economy vs. The S&P 500 Index.”
Dating back to 1970, the Global Recession Probability Model has correctly predicted global recession approximately 82% of the time. It looks at composite leading indicators (such as money supply, yield curve, building permits, consumer and business sentiment, share prices, and manufacturing production) for 35 countries. It is currently signaling a high probability of global recession.
The current U.S. recession risk is low. Most economists look at the yield curve and when it is inverted (the 10-year Treasury yield is below the 2-year Treasury yield), recession almost always follows (approximately nine months later).
While this is a good indicator, one of the indicators I favor most is “The Economy vs. The S&P 500 Index.” Many investors don’t think of the stock market as a leading economic indicator signal — but it is. When earnings roll over, typically economic conditions are worsening and thus the signal for the economy.
Here is how the signal works. When the S&P 500 Index rises above its five-month smoothed moving average price line by 3.6%, an expansion signal is generated. When it falls below the smoothed MA line by -4.8%, a contraction signal is generated. Dating back to 1948, this indicator has produced 79% correct signals. The process is updated monthly. The indicator remains in expansion signal. There is no sign of a U.S. recession yet. Here is a look at the historical data. Look at the arrows (signals). Not perfect, but pretty darn good.
By Steve Blumenthal | For more graphs and analysis of sentiment indicators see the full story in Trade Signals: Global Recession Probably High, No U.S. Recession Yet
The current opinions and forecasts expressed herein are solely those of Steve Blumenthal and are subject to change. They do not represent the opinions of CMG. CMGs trading strategies are quantitative and may hold a position that at any given time does not reflect Steve’s forecasts. Steve’s opinions and forecasts may not actually come to pass. Information on this site should not be used as a recommendation to buy or sell any investment product or strategy.
