Recession Indicators - CERN Indico
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Recession Indicators • FRED civilian unemployment rate • Yield curve inversion • GDP gap • FRED heavy truck orders • LEI (Leading Economic Index) • Purchasing Managers’Index (PMI) • AAII Sentiment Index • CLI (Credit Leading Indicator) • Survey of senior banks • FRED shipping orders
“It’s impossible to know when an overheated market will turn down, or when a downturn will cease
and appreciation will take it’s place.
But while we never know where we’re going,
we ought to know where we are.
We can infer where markets stand in their cycle from the behavior of those around us. When other
investors are unworried, we should be cautious; when investors are panicked, we should turn
aggressive.”
Howard Marks
Oaktree Capital, Billionaire
Unemployment Rate Source: U.S. Bureau of Labor Statistics, Unemployment Rate [UNRATE], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/UNRATE, March 20, 2022.
Yield Curve Inversion Source: Federal Reserve Bank of St. Louis, 10-Year Treasury Constant Maturity Minus Federal Funds Rate [T10YFF], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/T10YFF, March 21, 2022.
Real GDP– Real Potential GDP
GDP gap Real GDP
Potential GDP
OECD definition:
• Capital stock
• Potential labor force
• Non-accelerating inflation rate of unemployment (NAIRU)
• Level of labor efficiency
Real potential GDP is the CBO’s estimate of the output the economy would produce with a high rate of use of its capital and labor resources.
The data is adjusted to remove the effects of inflation.
Sources:
U.S. Bureau of Economic Analysis, Real Gross Domestic Product [GDPC1], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/GDPC1, March 21, 2022.
U.S. Congressional Budget Office, Real Potential Gross Domestic Product [GDPPOT], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/GDPPOT, March 21, 2022.
Heavy Trucking Orders Sources U.S. Bureau of Economic Analysis, Motor Vehicle Retail Sales: Heavy Weight Trucks [HTRUCKSSAAR], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/HTRUCKSSAAR, March 20, 2022.
Leading Economic Index (LEI) https://www.conference-board.org/pdf_free/press/US%20LEI%20PRESS%20RELEASE%20-%20March%202022.pdf
The PMI is a composite index based on:
Purchasing Managers’Index (PMI) • New Orders (seasonally adjusted)
• Production (seasonally adjusted)
• Employment (seasonally adjusted)
Insititute for Supply Management (ISM) • Supplier Deliveries (seasonally adjusted)
• Inventories
Data source:
https://www.quandl.com/data/ISM/MAN_PMI-PMI-Composite-Index
The PMI is a composite index based on:
Purchasing Managers’Index (PMI) • New Orders (seasonally adjusted)
• Production (seasonally adjusted)
• Employment (seasonally adjusted)
Insititute for Supply Management (ISM) • Supplier Deliveries (seasonally adjusted)
• Inventories
https://data.nasdaq.com/data/ISM/MAN_PMI
https://data.nasdaq.com/data/ISM/MAN_PMI
Templeton Cycle – Emotions in the Market
• Are the news good or bad?
• How many “newcomers” in the markets?
• Does the taxi driver talk about stock?
Source: http://www.bvmoney.com/investor-cycle/4592565916AAII Sentiment Survey https://ycharts.com/indicators/us_investor_sentiment_bull_bear_spread
AAII Sentiment Survey https://ycharts.com/indicators/us_investor_sentiment_bullish
AAII Sentiment Survey https://ycharts.com/indicators/us_investor_sentiment_bearish
Source: https://money.cnn.com/data/fear-and-greed/ 7 indicators for calculation: •Stock Price Momentum: The S&P 500 (SPX) versus its 125-day moving average •Stock Price Strength: The number of stocks hitting 52-week highs and lows on the New York Stock Exchange •Stock Price Breadth: The volume of shares trading in stocks on the rise versus those declining. •Put and Call Options: The put/call ratio, which compares the trading volume of bullish call options relative to the trading volume S&P500 of bearish put options •Junk Bond Demand: The spread between yields on investment grade bonds and junk bonds •Market Volatility: The VIX (VIX), which measures volatility •Safe Haven Demand: The difference in returns for stocks versus Treasuries
Valuations
Markets went up significantly – are stocks expensive?
S&P 500
S&P 600
S&P 400Valuations are high or low?
LargeCap
MidCap
SmallCap
https://www.yardeni.com/pub/stockmktperatio.pdf (Downloaded 24.03.2022)• Drop in P/E in S&P 500
dominated by growing earnings
(E) and not by price decline (P)
• P/E of index is not a very good
predictor of stock returns in the
future
https://www.multpl.com/s-p-500-pe-ratio
https://www.multpl.com/s-p-500-earnings(September 2021) https://www.multpl.com/s-p-500-real-earnings-growth
Carnage has been done in speculative assets
SPAC = Special Purpose
Aquisiton Company
There was a speculative
bubble which started bursting
in the beginning of 2021
https://www.onvista.de/index/IPOX-SPAC-PRICE-USD-Index-302514125Slide from last talk in September 2020
NOT ANYMORELast meeting in
September 2020
Interest rates went up -> Bonds go down!
TLT might become interesting in 2023
at end of rate hike cycle
Board of Governors of the Federal Reserve System (US), Market Yield on U.S. Treasury Securities at 10-Year Constant Maturity [DGS10], retrieved from FRED,
Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/DGS10, March 23, 2022.Possible Strategy (no advise – just opinion) • Long stocks until rate cycle is over • Reallocation of portfolio with certain percentage of TLT (or other bonds) • When interest rates go down (typical in recession) bonds go up in price.
Thank you!
Leading Economic Index (LEI)
The LEI can be broken down into 10 indicators that can be used to answer the following questions.
Are people needed to build things?
This indicator includes:
• Average weekly hours, manufacturing
• Average weekly initial claims for unemployment insurance
How much is being produced for consumers and businesses?
This indicator encompasses four components:
• Manufacturers' new orders for consumer goods and materials
• ISM Index of New Orders
• Manufacturers’ new orders for nondefense capital goods, excluding aircraft orders
• Building permits for new private housing units
How are markets and people seeing the world?
Here, the components include:
• S&P 500
• Leading Credit Index
• Interest rate spread (10-year Treasury bonds less federal funds)
• Average consumer expectations for business conditions
Source: https://blog.commonwealth.com/independent-market-observer/a-closer-look-at-the-conference-board-leading-economic-index
https://www.conference-board.org/pdf_free/press/US%20LEI%20PRESS%20RELEASE%20-%20OCTOBER%202019.pdfYou can also read
