Monday morning. 4/24/2015. On My Radar (Summary) by Steve Blumenthal
The consensus view sees economic improvement ahead while some see the economy getting worse. I share a chart today that shows every recession since 1950. The point is – there have been seven recessions since 1970 and the economists “consensus view” missed them all. Zero for seven is a poor track record on the very topic they focus on most.
I think there is a better way and I was reminded this morning about one of my favorite recession forecasting charts. I share it with you today and will begin including it each week in Trade Signals. For me, it mutes the noise and has a 79% accuracy rate dating back to 1950. Let’s take a look at the chart.
There of several points to note in the following chart. First, the gray areas in the chart mark periods of recession. Second, the down arrows show when the indicator predicted recession and the up arrows when it predicted the end of recession. Third, you can see that there were several head fakes (down arrows that didn’t materialize in recession) but each time the signal quickly corrected.
Here is a short summary of how to read the chart (source: NDR):
The chart compares the economy, as represented by the Commerce Department’s Composite Index of Coincident Indicators (top clip), with the monthly closing price of the Standard and Poor’s 500 Stock Index (bottom clip).
The S&P 500 is a capitalization-weighted (price times number of shares outstanding) index of 500 of the largest and best known common stocks. These include industrials, transports, utilities, and financials.
The S&P 500 generates an expansion signal for the economy when it rises above its eight-month smoothing by 2.0%. Conversely, it generates a contraction signal for the economy when it falls below its eight-month smoothing by 4.6%.
Because the stock market is a barometer of investor confidence in future business activity (as well as a source of capital for industry), it tends to be an excellent leading economic indicator. An NDR research study has found that from 1948 to 1991, the S&P 500 has led, on average, economic peaks by eight months and economic troughs by four months.
Given the Fed’s dual mandate to increase inflation and employment, let’s take a look at current inflation and the velocity of money in the next two charts. In short, inflation is not a problem currently and the velocity of money is at a record low.
For charts on inflation and money supply velocity see the full story and important disclosures in On My Radar – Recession Watch – Keep an Eye on this Chart
Steve Blumenthal is CEO and CIO of CMG Capital Management Group. The objective behind all of Mr. Blumenthal’s work is to help advisors build better portfolios by allocating with a long term game plan that is risk sensitive and properly diversified. Mr. Blumenthal is a self-proclaimed “quant geek” with an analytical mind for the markets that helps him connect with everyday investors and industry experts alike.