An insightful article today from Bill Hester at Hussman Funds discussing the recent statement from the NBER's Business Cycle Dating Committee saying that it was unable to declare the end of the recession—yet: “Although most indicators have turned up, the committee decided that the determination of the trough data on the basis of current data would be premature.”
Hester's article takes us through the 5 main metrics that the NBER Committee uses to define the end of a recession and shows us why 4 of them are so far faltering well below the average improvement we would normally see at this point in a typical economic recovery. These are the same concerns that Martin Feldstein has noted in his belief that the Business Cycle Dating Committee should postpone declaring the end of the recession. Feldstein has two main concerns. One is that most of the data the group looks at will be revised over the next few months, and it is presently difficult to clearly see a date that the economy turned up. His second point is that this time the recession dating process is “complicated by the fact that we are still far below the levels that the economy was at when it turned down, and in my judgment, there is a continuing risk that this economy could run out of steam and could turn down again.” When we look at the 5 charts in Hester's article we can see Feldstein and the NBER Committee's hesitation to sound the all clear.
A further interesting study, Hester looks at the second year of the presidential cycle and notes that when markets start into the April-September period (which we just entered) at high valuations (present CAPE 22) the average return in these periods was -11%, and includes 2002 when the S&P fell by almost 30%. And following an April to September decline, the markets typically enjoyed a strong 12 month period again starting in the fourth quarter of year two. This market has been looking for a good excuse to test downside support for months now. Maybe this will be it. The economic loss to travel and trade goods caused by Iceland's volcanic ash also won't help the struggling global recovery.
The Hester article is well worth the read. See: Business Cycles, Election Cycles and Potential Risks
On a separate note regarding the Goldman Fraud charges and today's market action. We saw a big sell-off overseas last night and in early trading this morning in North America, followed so far, by a late day rebound. I think the rebound today in North America is a testament to the extreme arrogance of Wall Street and its assumption that the SEC charges will be successfully defeated or bought off in a relatively small fine behind closed doors. I think that they are overly-confident because they have got away with so much for so long. Perhaps they will again.
It is my impression however that this issue will be with financial markets for a lot longer than today's rebound admits. I would suggest that present optimism is another opportunity to sell risk into strength and opt for caution over the next few months while some of these key themes play out.
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