The 7th Inning – This Recovery Is Almost Done
The last several weeks there has been a greater amount of noise around our current economic recovery. In fact, some have strongly stated this recovery is done. In digging deeper (as you always need to!), the crux of these statements boiled down to a few things:
- The market and economy have been in an expansion for so long
- Stock prices are a little bit expensive
- From a business cycle point of view, we are 80% finished with the recovery, so buckle up for a recession
We’ve talked about the top two a bit before, so let’s focus on that last point. We’ll tackle the second part of that statement first about an oncoming recession.
People often refer to what are called leading economic indicators when thinking about a recession. This indicator index is intended to see what is moving in the economy, and specifically look at the parts of the economy which tend to be more forward looking vs. measures that reflect the now or where we have been. If these leading economic indicators point downward, then they are indicating an economic decline. One example of a leading indicator is inventory levels. If a business feels positive about the future, they buy inventory. If they feel negative, they don’t.
Here is how the leading indicators are shaping up now:
The blue line is the US Weekly Leading Index and the gray shaded areas are historic recessions we have had in the U.S. A couple of things jump out:
- Before each shaded gray area (recessions), there is a notable dip in the leading economic indicator index. The metric works!
- The line is dipping right now…uh oh!
However, there are a ton of dips on that blue line that didn’t lead to a recession. So, yes, this line predicted 100% of the recessions, but it also “predicted” countless recessions that never happened!
Now for the first part of the statement. Let’s take as fact (even though no one knows) that this recovery is indeed 80% done. Look below at market performance over the course of this stock market recovery from March 9, 2009 through August 31, 2017.
For this period of time, the S&P 500 Index is up an incredible 265%! But let’s get back to the “fact” – this recovery is 80% done and do some simple math. If this is 80% done, that means there has to be another 20% of a recovery left. If we got 265% out of the first 80% of the recovery, a full 100% recovery on the same trajectory would mean by the end of this the S&P might be up 331% from the bottom! If you acted now on the worry that a recession is imminent, then that’s a whole lot of return you’d miss out on.
It’s so enticing to make a change to a portfolio because of a worry, especially a realistic one like a recession when you have data backing up your worry. After all, not changing seems like you are willingly driving a car straight into a wall. But that analogy isn’t entirely accurate. A recession is more like driving your car through a construction zone where you might have to take a detour, or slow down a bit at least, until you can resume your drive to the ultimate destination. So just make sure you have a car (portfolio) that you are comfortable in for the inevitable detour (recession).
The S&P 500 Index is widely regarded as the best single gauge of the U.S. equities market, this world-renowned index includes a representative sample of 500 leading companies in leading industries of the U.S. economy.
The US Weekly Leading Index is an index provided by the Economic Cycle Research Institute (ECRI) and dates back to 1967. The components of the index are proprietary and has a moderate lead over cyclical turns in U.S. economic activity according to ECRI.