Recession Forecast

Everyone wants a cristall ball to forecast the future, especially in trading. Here I give you 3 easy to monitor indicators, which indicate in the past a recession ahead of time.

The 3 indicators are:

  1. 12-month moving average of housing starts,
  2. Leading Index for the United States  and
  3. the yield curve

1. Housing Starts

 

2. Leading Index for the United States

3. Yield curve

As you can see, these three indicators gave a good warning sign in the past. Every time they indicated a recession ahead of the official declaration.

This it is an easy and valuable indicator, which can help you a lot to indicate, whether to leave the bull market or to stay.

Here are 3 things, that trades and investors should monitor too:

  • the trend of corporate earnings and expectations for future earnings,
  • the likelihood of an impending economic recession and
  • the trend of stock prices

Watch these items carefully.

Some explanation about these indicators.

Let`s start with number 3, the yield curve.

In economics, the yield is a central (the main) price for nearly everything. Therefore it is watched by everybody who is interested in the economy.
The main driver of the economy is the companies. They build things or services and sell it to other companies or customers. Normally they don’t have enough money to build up a company. Therefore they borrow some money. This has a price, the yield. If the price of the money is low, then they will borrow the money, because they will earn enough money to pay all the bills and the yield. If the yield increases, it is less profitable for them to produce the stuff or services. Therefore they do not offer new / more things. If the yield increases more it can be, that they reduce their offer of products and services or some will go out of business. So the overall supply will not increase or perhaps decrease.
This means if the yield increases then it gets harder to make money for the companies. To a certain degree, the increase in yield will not affect the overall economy. But there is an unknown point and at this point, the overall supply (GDP) will decrease. After this point, the yield will decrease again.
Bottom line: For a limited but unknown time the yield can rise and the economy can rise. But after an unknown point, the economy will decrease and the yield will decrease too.

Number 2, the Leading Index:

This indicator is created by the Federal Reserve Bank of St. Louis (Fred) and tries to give a forecast, where the economy will move. So, they want the same as we want.
Here is the explanation of this indicator:
The leading index for each state predicts the six-month growth rate of the state’s coincident index. In addition to the coincident index, the models include other variables that lead the economy: state-level housing permits (1 to 4 units), state initial unemployment insurance claims, delivery times from the Institute for Supply Management (ISM) manufacturing survey, and the interest rate spread between the 10-year Treasury bond and the 3-month Treasury bill.

Number1, the Housing Starts

Housing starts have been a good indicator for the economy, because they are the biggest (and most expensive) thing, what people normally will buy. If they try to build (and buy) a new house, it means, that they have enough money or that they can borrow it (see yield curve). Furthermore, they have enough confidence in the economy and in their ability to afford it. Besides the house, they will buy a lot of other stuff for the house, like kitchen, carpet and so on. On top of that, they will pay the all the workers, which made this house possible. This has a lot of positive impacts for other people. Therefore are increasing numbers of Housing starts very important for the future of the economy and a good leading indicator.

 

Looking forward in 2018 (from 01/15/2018)

Looking to 2018, S&P 500 earnings are expected to grow 16-17%, with further growth of 7% expected in 2019.

As long as earnings are growing, job growth is expanding and inflation remains in check, stay fully invested

You should come back from time to time and check these 3 indicators.

Bottom line

The key to making money in the stock market is to ignore the headlines, stick to your plan and respect the trend of stock prices, which is still bullish.

A correction of more than 10% in the S&P 500 Index normally plays out over 2-4 months, and we are approaching the 3-month mark (04/23/2018) in this decline from the 1/26/18 peak.