“I don’t know if there will be a recession in the US, but chances are rising so let’s assume there will be… If that’s the case, investors need to be on the lookout for signals that are not as stale as employment and GDP. Historically, Purchasing Managers’ Index (PMI) surveys have been the best leading indicators. We expect these surveys to continue falling, but will be watching closely for turning points.
Another equity market signal: in past cycles, equity markets did not bottom until long term Treasury yields were declining, or at least until they stopped rising.”
The latest Eye on the Market had an interesting section on the potential opportunity cost of trying to market-time an economic recession. The stock market tends to be an economic leading indicator. In six of the major post-World War II recessions, we have seen market bottoms while the economy continued to get worse.
In those cases, on average, the stock market bottomed approximately four months before the economy (as measured by GDP). Investors would have missed an average of 19.3% in equity market returns if they waited for an economic bottom and 31.7% if they waited for the economy to start rising again.
I should note that the second equity market signal mentioned – long-term Treasury yields – peaked at 3.49% on June 14th and closed at 3.10% on Friday (see the graph of the week below).
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