Tuesday, July 28, 2009

Is the recession over ?

Is the recession over? I think the odds favor the view that if it isn't already over it will end within the next couple of months. Of course, unemployment generally continues to rise even after a recession ends. But the fact that the stock market made a low nearly 5 months ago is a strong indication that economic activity will grow stronger as the months pass. Historically speaking, a stock market low precedes the end of a recession by less than 6 months.

The first chart above this post comes from the July 25 edition of the New York Times. It appeared in Floyd Norris' column. It depicts the behavior of the index of leading indicators near the troughs of recessions which occurred during the past 40 years. You can see that the index of leading indicators is trending strongly higher now and that is almost a sure sign that economic activity is starting to pick up and that the recession's end is imminent.

At the top of this post is an image of the latest Newsweek magazine cover. It depicts a balloon labeled "The Recession is over" about to be pricked and deflated by a pin labeled "good luck surviving the recovery". The cover story inside the magazine follows that theme. It says that even if a recovery has begun, it will be slow and that the next few years will feel like a recession anyway. Moreover, it goes further by asserting that this economic recovery will be qualitatively and quantitatively different from past recoveries - the damage done by the collapse in confidence will supposedly limit the economy's ability to grow for years.

From a contrarian traders's point of view this cover is more evidence that the bull market signal for aggressive contrarians will work out well. Newsweek is feeding the predjudices of the enormous bear market investment crowd that developed during 2008. But as prices rise this crowd will start to disintegrate and the resulting buying will provide a very strong upward impetus to the market averages.

One more observation: it is a well-established empirical fact about recessions that fast, deep declines in economic activity are followed by fast, steep recoveries. So Newsweek's prediction that this time will be different flies in the face of historical precedent.


  1. Carl,

    I agree with your contrarian theory short to intermediate term. I believe the stock markets are rebounding all over the world for two main reasons: 1.Stimulus packages all over the world creating new consumption 2.Inventory replenishment.

    Basically newly printed money all over the world (some central banks in emerging countries are not as transparent when it comes to making the printing news public) is giving a steroid boost to consumption. This might puch the markets up for another 3-6 months (btw, I agree with your prediction that S&P could go up to 1100 in this run) or until central banks sense inflation threats.

    Sooner than we think, inflation is going to become a big problem all over the world, and with that the need for interest rate hikes. And that's when I predict a big long leg down. We might test March bottoms or even further go down, but what I strongly believe is a new cyclical bull market is not going to happen for another 2-3 years, 2012 would be a good bet.

  2. Of course you are aware that the final stock market low came a year and a half after the last recession was over. If you look at the numbers closely, it is one of the largest fallacies in the market that stock market lows precede an end of arecession by 6 months. Its similar to the mantra of "dont fight the fed" which over the past 30 years if you DID fight the fed, you would have saved or made alot of money. Im just looking at history and the facts

  3. No jobs, no recovery.

    Actual unemployment is 16.5% if you calculate it with 1990 methodology.

    It's 20% if you calculate it with 1920's methodology.

    I follow your trading blog because you're really good making money on the bull side, and I hope you ride this rally and make plenty of money...

    But I would advise anyone against holding long overnight.

  4. "If you look at the numbers closely, it is one of the largest fallacies in the market that stock market lows precede an end of arecession by 6 months"

    Not true. Let's look at the numbers. Here is the time in months from the stock bottom to the end of every recession going back to 1929: 10, 4, 8, 6, 10, 5, 5, 6, 7, 5, 5, 6, and -10. The -10 is the last recession and the only one where the bottom came after the recession. This what I noticed after actually doing the research and looking at the numbers closely instead of just relying on hearsay by the financial media.

    Do I think we'll get strong, sustainable economic growth? Absolutely not. Do I think we can run up to 1100? Absolutely. If we do, I'm taking everything off the table though and buying some 3x bear ETFs or some deep ootm puts.

  5. Might want to give Newsweek some credit. Remember, Carl, you called this pack of magazine covers contrary when in fact they were right on the money. January 2008


  6. i continue to be amazed at how bearish so many people are on the economy and the equity markets...on the whole i believe investment managers are still underweight equities, and will be scrambling to get exposure for the end of year ramp up...

    additionly, the folks at ECRI (economic cycle research institute) continue to pound the table on the economic recovery that is under way (i am not affiliated with ECRI in any manner, i just follow their analysis):


    "...The index's annualized growth rate ticked up to 17.5 percent after hitting a 26-year high of 14.3 percent last week, which was also revised higher from 13.4 percent.

    It was the highest yearly growth rate the index has seen since the week to July 29, 1983, when it was 17.8 percent.

    It is high time to break from the herd of pessimistic analysts, who will continue to bemoan economic weakness long after the Great Recession is history," said Lakshman Achuthan, Managing Director at ECRI.

    Achuthan told Reuters last week that he expects the recovery to take hold at a stronger pace than any the U.S. has seen since the early 1980s..."