How many thousands of investors heeded the recession call and are sitting in disbelief on the side-lines (or heavily hedged) in this rally wondering when the recession is going to arrive and vindicate their decisions?Many analysts dismiss the usefulness of co-incident indicators in recession dating, with the notion that by the time you realize its recession with co-incident indicators, the horse has bolted.Therefore the use of leading-indicators is advocated and the longer the lead the better. We can be far more accurate in dating recession using short-leading and/or co-incident economic indicators but does this really add no value as common wisdom seems to dictate?Come to think of it – is it even really worth taking any defensive action with looming recession?BUT IT IS NOT CRUCIAL and arguably unless your leading indicator is dead accurate (which cannot be guaranteed) it is possibly NOT IDEAL unless it has a short lead.Given the far higher dating accuracy one can achieve with statistical models deploying co-incident indicators, you ignore co-incident data at your peril.Two days later, the S&P-500 bottomed and rose and incredible 22% since.In December 2011, ECRI “dialled down” their call to “within 9 months”. It is understandable that long 10-12 month warnings would be useful for governments and some business leaders planning factory/infrastructure build-outs or acquisitions, but is this true for the stock market participant?
If we include the 19 recessions, then the analysis tells us the stock market peaks 7.3 months on average before the onset of recession.Think about this – it has been 5 months since ECRI’s recession call and the stock market has rallied more than 22% since. Now for the big surprise – DROP2 is much bigger than DROP1 – almost double!That hits most seasoned investors and clients we have revealed this to right between the eyes.We will measure 4 metrics, namely P2NBER (how many months elapsed from the NYSE peak to the 1st month of recession), DROP1 (how much % the NYSE declined in the P2NBER months), NBER2T (how many months elapsed from the 1st month of recession to the NYSE correction inter-recession trough) and DROP2 (how much % the NYSE declined from the 1st month of the recession to the NYSE inter-recession trough.) The conventional wisdom tells us DROP1 will be much larger than DROP2 – the earlier your warning and the sooner you get out, the better.The results of this exercise are tabled as follows: What jumps out is that the conventional wisdom held until 1973 and then underwent a dramatic change, with the stock market becoming much more timely in signalling recession as shown by the dramatic fall in the size of the months in the P2NBER column.