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MAKING CENTS OUT OF THE NEWS
Blog #39
(November 24th, 2011)
Recession Fears – Are You Looking for the Boogeyman or Studying the Indicators?
By Tom McAllister, CFP®
A boogeyman, according to Wikipedia, is an amorphous imaginary being used by adults to frighten children into behaving. Right now, the boogeyman striking fear into the heart of investors seems to be that of a “double-dip” recession.
The financial press, true to form, focuses only on the bad news, thus feeding these amorphous fears. Add the economic and debt crises in Europe, and it is no wonder the average investor is fearful. However, as I have explained here several times, a true “double-dip” is impossible, since the most recent recession ended in June, 2009 with the U.S. economy in a weak recovery ever since! A new recession now would be unprecedented in our history. We have never had a recession after the leading economic indicators (LEI) have been rising for six months in a row, which is what is happening today. Please note that the LEI prior to the most recent recession (2007-2009) had been falling for three years!
Let’s look carefully, not at boogeymen, but at these indicators:
One component in the leading economic indicators is the yield curve. Professional fixed income investors watch this indicator carefully, because it shows the spread (difference) between long and short term interest rates. Right now that spread is greater than 200 basis points, meaning a positive 2/100 of one percent. (The yield curve rate has always been low to negative before a recession).
Another consideration for investors is that, since World War II, no recession has begun until corporate profits per employee had declined for at least six straight months. The reverse is true today, with corporate profits continuing to rise. Profitability precedes job growth in a recovering economy, and that is the case now. After all, w would employers be hiring new employees if their profitability were on the decline?
The ten year U.S. Treasury yield minus the S&P 500 dividend yield is another leading indicator. It is near zero today. This is very close to where it was at the stock market bottom in early 2009. Never in modern history has a recession started when this difference is below 2%!
It is very doubtful that another recession is around the corner (no matter what Bill O’Reilly believes). All the indicators point in one direction, and that direction is not down! Instead, if history is any guide, we are highly unlikely to have a “bear” market in the next fifteen months.
I don’t know about you, but I’m not wasting energy looking in my closet and under my bed for any double-dip recession boogeymen. Instead, I’m looking at the facts and indicators, and they are what is behind my optimism regarding the intermediate and long term potential for quality stock investments!
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