Tuesday, August 4, 2015

Timing the Next Bear Market (excerpt)

Since bear markets are usually caused by recessions, timing the next significant drop of 20% or more in stock prices depends on forecasting the next recession accurately. Previously, I have explained why March 2019 is a plausible estimate for the start of the next recession based on the average length of previous economic expansions.

Perhaps there are some leading indicators that might help us anticipate the next bear market. Consider the following:

(1) Leading indicators. The problem is that the S&P 500 is one of the 10 components of the Index of Leading Economic Indicators (LEI). In other words, the market is already discounting future economic developments including booms and busts. How about the spread between the 10-year Treasury bond yield and the three-month Treasury bill rate? The yield curve spread is a component of the LEI as well. The same goes for initial unemployment claims. They all remain in bull market territory.

(2) Industrial commodity prices & the BBB. I am a big fan of the CRB raw industrials spot price index as a daily real-time indicator of the global economy. It’s looking bearish for stocks currently. However, I also divide it by initial unemployment claims to derive my Boom-Bust Barometer, which remains relatively upbeat, signaling neither a boom nor a bust.

(3) Misery Index. A less timely indicator is the Misery Index, which is the sum of the unemployment rate and the PCED inflation rate. It too tends to rise during bear markets without providing much warning. In June, it fell to 6.6%, the lowest reading since August 2007, with the unemployment rate at 5.3% and inflation at 1.3%. Perhaps this is a useful warning: When misery is as low as it is now, the next big move in the index has tended to be in a more miserable direction. However, keep in mind that there is still room for less misery given the 5.3% lows of both February 1966 and August 1999.

Today's Morning Briefing: Less Misérables. (1) No bargains in US. (2) Plenty of bargains in Greece, but for good reasons. (3) Timing the next bear market and recession. (4) The problem with bear market indicators. (5) The Boom-Bust Barometer sees neither. (6) The Misery Index loves companies. (7) Room for less misery. (8) Will the bear market in commodities trip up secular bull market in stocks? (9) Will China’s next shock-and-awe show be shocking enough to boost commodity prices? (10) Easing on down Silk Road. (11) Italian manufacturing is on the mend. (12) Will one-and-done be followed by a melt-up? (13) Blankfein’s big sniff. (More for subscribers.)

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