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Have We Already Entered Recession?.

  • Written by Syndicated Publisher 45 Comments45 Comments Comments
    August 25, 2011

    Does it matter whether the economy is only muddling along the bottom of a very weak period, or is declining into a recession?

    I’m increasingly hearing that it does not really make much difference to corporate earnings or the stock market. Recession is just a word. The difference between weak GDP growth of 1% and negative growth of minus 1% or even minus 2% for a couple of quarters should not be important to earnings, investors, or the market.

    But history says it is important.

    The market has often experienced only a ‘correction’ in anticipation of a slow economic period. But it has always experienced a bear market (a decline of more than 20%) when a slowing economy slides all the way into a recession.

    For example, there have been seven recessions since 1970 and eight bear markets. (There was no recession associated with the 1987 crash). The average decline for the Dow in the seven bear markets associated with recessions was 35%. The two most recent, the 2000-2002 and 2007-2009 bear markets resulted in declines of 50% for the S&P 500.

    So history says there is a big difference to the market between very weak GDP growth and a further slide to any degree of negative growth that would define a recession.

    So Are We In Or Entering a Recession?

    If not, and the market is only experiencing a correction (less than a 20% decline by the Dow and S&P 500), that criteria has already been met, with the S&P 500 down 17% or so.

    But if the economy is in or entering a recession, the bottom could be significantly lower.

    I’ve been noting for some time that it doesn’t do us much good to wait until the government tells us we’re in a recession, since that determination is almost always made many months after a recession has begun and already ended. Wall Street is never much help either, constantly in a state of denial regarding anything negative that might cause investors to stop buying, or heaven forbid go after gains from a market decline.

    So we have to make the determination for ourselves.

    Much of our current newsletter is devoted to that determination based on our intermediate-term technical indicators, but also on the Four-Year Presidential Cycle, where we stand in the sideways secular bear market that began in 2000, and various domestic and global economic conditions and trends.

    A month ago in the free section of this blog I showed you the following chart of the Chicago Fed National Activity Index.

    It had been in negative territory in June for the 3rd straight month. And its three-month moving average declined further, from -0.31 in May to -0.60 in June.

    And as the chart showed, at -0.6, it was perilously close to the -0.7 level that has marked the beginning of the last 7 recessions. The vertical gray stripes are recessions since 1970. (Chart is courtesy of Doug Short).

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    The Chicago Fed released the reading for July yesterday. The index remained negative in July for the 4th straight month, but improved to minus –0.06 from minus –0.38 in June. And its3-month moving average remained negative, but improved to minus –0.29 from minus –0.54.

    So in July it remained fractionally above the minus –0.7 that has marked the beginning of all the recessions since 1970. (the chart has not been updated to yesterday’s reading).

    So on that measurement anyway the jury remains out.

    Market Is Factoring In Hope for Fed Action.

    The market remains short-term oversold, and it has a potential catalyst to try another rally attempt to alleviate the short-term oversold condition, the potential catalyst being hope that Fed Chairman Bernanke will offer some kind of promise of QE3 is his speech on Friday at the Fed’s Jackson Hole conference.

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    To read my weekend newspaper column ‘Has The Relief Rally Ended Already?’ click here!

    Yesterday in the U.S. Market.

    A basically flat close, but plenty of intraday volatility. The Dow was up as much as 203 points in the early going but couldn’t hold onto the gain, closing up only 37 points, or 0.3%.

    It was on relatively light volume, with only 1.2 billion shares traded on the NYSE, less than half the daily volume in the big-down days of the previous few weeks.

    The Dow closed up 37 points, or 0.3%. The S&P 500 closed up 0.1%. The NYSE Compositeclosed up 0.1%. The Nasdaq closed up 0.1%. The Nasdaq 100 closed up 0.3%. The Russell 2000 closed down 0.1%. The DJ Transportation Avg. closed up 0.1%. The DJ Utilities Avgclosed down 0.4%.

    Gold closed up $23 an ounce at $1,891 an ounce, another new record high.

    Oil closed up $2.03 a barrel, at $84.30.

    The U.S. Treasury bond etf TLT closed down 0.3%.

    The U.S. dollar etf closed up 0.2%.

    From StreetSmartPost.

    Images: Flickr (licence attribution)

    About The Author

    Sy Harding publishes the financial website www.StreetSmartReport.com and a free daily Internet blog at www.SyHardingblog.com. In 1999 he authored Riding The Bear – How To Prosper In the Coming Bear Market. His latest book is Beat the Market the Easy Way! – Proven Seasonal Strategies Double Market’s Performance!
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