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1939-1965: Utility Stocks v. Interest Rates
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1947-1970: Inventory-Sales Ratio
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1958-1976: Gold Expert
1963-1977: Farmland Values
1971-2018: Nasdaq v. Gold
1971-1974: REIT Crash
1972-1979: REIT Index Crash
1986-2018: Hang Seng Index Cycles
1986-2019: Crude Oil Cycles
1999-2017: Cell Phone Market Share
2008: Transaction History
2010-2021: Bitcoin Cycles -
Interesting Read
Inside a Moneymaking Machine Like No Other
The Fuzzy, Insane Math That's Creating So Many Billion-Dollar Tech Companies
Berkshire Hathaway Shareholder Letters
Forex Investors May Face $1 Billion Loss as Trade Site Vanishes
Why the oil price is falling
How a $600 Million Hedge Fund Disappeared
Hedge Fund Manager Who Remembers 1998 Rout Says Prepare for Pain
Swiss National Bank Starts Negative
Tice: Crash is Coming...Although
More on Edson Gould (PDF)
Schiller's CAPE ratio is wrong
Double-Digit Inflation in the 1970s (PDF)
401k Crisis
Quick Link Archive
Category Archives: recessions
Unemployment Rate: July 2020
On April 11, 2014, in an attempt to project the direction of unemployment and the subsequent economic outcome, we said the following:
“Given our prior experience with Dow Theory and downside projections, any decline in the unemployment rate below 5.87%-5.90% would be exceptional with only the 4.40% and 3.80% levels as mere reflections of an overextended economic boom which should be followed by an equally impressive bust.”
On August 24, 2018, we said the following:
“If the unemployment rate drops further then we would have stretched the capacity of the economy to its 48-year limits on the downside. If the unemployment rate increases from the current level it would, as has been the case in the past, jump dramatically.”
Since August 2018, the unemployment rate declined to 3.50% in December 2019. The dramatic jump in the unemployment rate has followed immediately afterwards.
Up Next: Unemployment Forecast
Posted in recessions, Unemployment
Unemployment Rate: March 2020
On August 23, 2009, in our call that the recession was over, we said the following:
“I doubt that the general public will agree that the recession is over since jobs will not be as plentiful as the past.”
From the low in 2009 to 2014, many questioned the rising stock market and economy because job growth was not as strong as hoped. However, it should have been understood that to achieve such accelerated job growth comes at a very expensive price.
On July 2013, we said the following of the unemployment rate:
“It is important to understand that the 10% and 3.8% unemployment rates are undesirable scenarios. The 10% unemployment rate is in the depths of a “recession” and the 3.8% unemployment rate at the height of a overextended economic boom.”
On August 24, 2018, we said the following of the unemployment rate:
“Presently, we anticipate the unemployment rate rising to the 6.30% level as a natural reaction to the current low levels. While the unemployment rate can go lower, there is a tremendous tradeoff to achieving lower levels. It is quite possible we have seen the best of times with a declining unemployment. Anything below the current levels will come at a tremendous cost in the next recession.”
The current environment bears out the concerns that we’ve had about the unemployment rate decreasing below 3.80%. Once we get beyond a certain tipping point the reaction is swift and unnecessarily painful.
The Outlook
According to the Washington Post dated March 23, 2020, the projected unemployment rate is likely to range from 9% to 30% based on the fallout from the coronavirus (COVID-19). Our August 2018 projection of 6.30% remains, as it is the first stopping point to any higher level beyond Goldman Sach’s 9% or St. Louis Federal Reserve President James Bullard’s 30%.
These estimates, in our view, are knee jerk reactions in a vacuum. As we were concerned about going below 3.80% in the unemployment rate back in 2013, we’re going to wait until we reach 6.30% before we can offer up a measure perspective on the situation.
Please keep in mind that none of what has occurred, at least from a data standpoint, is unusual or unexpected. Of course we couldn’t predict that a pandemic was coming. Yet, the data, from a historical standpoint, suggested that the low range was at an extreme and was bound to react to the upside.
NYT Recession/Depression Index
Below is the monthly New York Times Recession/Depression Index from January 2000 to March 2019.
Visit our December 30, 2018 explanation of this index (found here).
The Recession of 2014-2016
On January 15, 2016, we said the following in our conclusion to our Dow Theory assessment:
“What are we looking for from Dow Theory now? We’re hoping that the Dow Jones Industrial Average can decline below the August 2015 low to confirm what the other indexes have already done. Additionally, we’re looking for the INDPRO to continue its trend lower to confirm that we are in a recession and a bear market. We think that if we are in a recession, the NBER will label either the December 2014 or August 2015 peaks as the beginning of a recession in approximately six to nine months from now.”
On September 30, 2018, in a New York Times article titled “The Most Important Least-Noticed Economic Event of the Decade” said the following:
“Sometimes the most important economic events announce themselves with huge front-page headlines, stock market collapses and frantic intervention by government officials.
“Other times, a hard-to-explain confluence of forces has enormous economic implications, yet comes and goes without most people even being aware of it.
“In 2015 and 2016, the United States experienced the second type of event (Irwin, Neil. "The Invisible Recession of 2016." New York Times Sep 30 2018, Late Edition (East Coast) ed. ProQuest. 3 Apr. 2019 .).”
As time passed, and after not getting a recession call from the National Bureau of Economic Research, we rationalized away, or pushed back the expected date of a recession call. It was not until reading this article from the New York Times were we able to realize that our initial take was accurate and timely.
Posted in Dow Theory, recessions
New York Times Recession/Depression Index
When the economic data can’t get any better than it is then it is time to shore up your finances. One way to generalize about the economic conditions is to take a look at the New York Times Recession/Depression Index.
What is the New York Times Recession/Depression Index? It is the number of references to either a recession or a depression. In our modern era, the terms “panic” and “depression” are no longer an acceptable part of the general lexicon to denote a decline in economic activity. However, in the late 18th and early 19th century, they told it like it was. in the mid- to late 20th century, the word “recession” replaced the word panic or depression.
In order to tackle the data, we need a reference point. The best starting point is the National Bureau of Economic Research’s (NBER) indication of when a recession begins (peak) and ends (trough). Below are the designations of both periods from 1854 to 2009.
Peak | Trough |
December 1854 (IV) | |
June 1857(II) | December 1858 (IV) |
October 1860(III) | June 1861 (III) |
April 1865(I) | December 1867 (I) |
June 1869(II) | December 1870 (IV) |
October 1873(III) | March 1879 (I) |
March 1882(I) | May 1885 (II) |
March 1887(II) | April 1888 (I) |
July 1890(III) | May 1891 (II) |
January 1893(I) | June 1894 (II) |
December 1895(IV) | June 1897 (II) |
June 1899(III) | December 1900 (IV) |
September 1902(IV) | August 1904 (III) |
May 1907(II) | June 1908 (II) |
January 1910(I) | January 1912 (IV) |
January 1913(I) | December 1914 (IV) |
August 1918(III) | March 1919 (I) |
January 1920(I) | July 1921 (III) |
May 1923(II) | July 1924 (III) |
October 1926(III) | November 1927 (IV) |
August 1929(III) | March 1933 (I) |
May 1937(II) | June 1938 (II) |
February 1945(I) | October 1945 (IV) |
November 1948(IV) | October 1949 (IV) |
July 1953(II) | May 1954 (II) |
August 1957(III) | April 1958 (II) |
April 1960(II) | February 1961 (I) |
December 1969(IV) | November 1970 (IV) |
November 1973(IV) | March 1975 (I) |
January 1980(I) | July 1980 (III) |
July 1981(III) | November 1982 (IV) |
July 1990(III) | March 1991(I) |
March 2001(I) | November 2001 (IV) |
December 2007 (IV) | June 2009 (II) |
With the established data on what was considered by the National Bureau of Economic Research as a recession (peak to trough) and expansion (trough to peak), we now have a basis for the quality, or lack thereof, in the New York Times Recession/Depression Reference Index.
The Index
Below is a charting of the data on references made by the New York Times to the words “recession” and “depression.”
Does the Data Match?
For the purposes of clarity, we’ve highlighted the peaks in references to the words “depression” and “recession.” Do any of those peaks happen to match up with the NBER definitions of a period of economic contractions? From what we can tell, there is a 100% coincidence between the peak in the references and either being in a recession/depression or at the beginning of such a period.
2005 to 2018
When looking at the last full cycle, from March 2006 to December 2018, we can see the peak in references to “recessions” which occurred in the month of March 2009.
For the Dow Jones Industrial Average, the period from January 2005 has a clear inverse relationship to the New York Times Recession/Depression Index in the same period of time.
At the current level in the New York Times Recession/Depression Index, would anyone be surprised if a recession were to emerge in 2019? We wouldn’t be surprised.
The Dow and Recessions
The following is raw data on the performance of the Dow Jones Industrial Average (DJIA) versus the National Bureau of Economic Research (NBER) call of a recession from the peak to trough from 1900 to 2018.
Our aim is the determine if there is any coincidence or correlation between the two. We’d also like to emphasize that it would be especially ideal if there is confirmation of the idea that the stock market is a leading indicator for the economy.
Simple Coincidence
Below is the simple coincidence of the DJIA and NBER. This takes the date when the NBER calls a recession or an expansion and registers the level of the DJIA for the first trading day of month that an NBER call takes place and registers the level of the DJIA when the next NBER call begins.
The times when an recession was called but the DJIA was instead higher is indicated in red. As an example, On August 1, 1918, the NBER indicated that there was a recession until March 1, 1919. In that same period, the Dow increased from 80.71 to 85.58.
There was no instances of an expansion period being called by the NBER that was followed by a lower level in DJIA.
Date | NBER | DJIA |
December 1, 1900 | expansion | 66.43 |
September 1, 1902 | recession | 66.55 |
August 1, 1904 | expansion | 52.73 |
May 1, 1907 | recession | 83.87 |
June 1, 1908 | expansion | 74.38 |
January 1, 1910 | recession | 98.34 |
January 1, 1912 | expansion | 82.36 |
January 1, 1913 | recession | 88.42 |
December 1, 1914 | expansion | 56.76 |
August 1, 1918 | recession | 80.71 |
March 1, 1919 | expansion | 85.58 |
January 1, 1920 | recession | 108.76 |
July 1, 1921 | expansion | 91.26 |
May 1, 1923 | recession | 97.40 |
July 1, 1924 | expansion | 96.45 |
October 1, 1926 | recession | 159.69 |
November 1, 1927 | expansion | 181.65 |
August 1, 1929 | recession | 350.56 |
March 1, 1933 | expansion | 52.54 |
May 1, 1937 | recession | 174.59 |
June 1, 1938 | expansion | 110.61 |
February 1, 1945 | recession | 153.79 |
October 1, 1945 | expansion | 183.37 |
November 1, 1948 | recession | 189.76 |
October 1, 1949 | expansion | 182.67 |
July 1, 1953 | recession | 269.39 |
May 1, 1954 | expansion | 319.35 |
August 1, 1957 | recession | 506.21 |
April 1, 1958 | expansion | 445.47 |
April 1, 1960 | recession | 615.98 |
February 1, 1961 | expansion | 649.39 |
December 1, 1969 | recession | 805.04 |
November 1, 1970 | expansion | 758.01 |
November 1, 1973 | recession | 948.83 |
March 1, 1975 | expansion | 753.13 |
January 1, 1980 | recession | 824.57 |
July 1, 1980 | expansion | 872.27 |
July 1, 1981 | recession | 967.66 |
November 1, 1982 | expansion | 1,005.70 |
July 1, 1990 | recession | 2,899.26 |
March 1, 1991 | expansion | 2,909.90 |
March 1, 2001 | recession | 10,450.14 |
November 1, 2001 | expansion | 9,263.90 |
December 1, 2007 | recession | 13,314.57 |
June 1, 2009 | expansion | 8,721.44 |
December 1, 2018 | recession | 25,826.43 |
There were 8 instances (17%) where there was no coincidence with the call of a recession or expansion and a commensurate decline or increase in the DJIA.
The above coincidence data is graphically represented below. The areas in red includes the the divergence of the NBER call for a recession and the DJIA along with the period that immediately followed. This is basically showing that any recession indication that is followed by an increased in the DJIA, and the subsequent expansion calls, are not considered to be coincidence until after the last expansion and the next coincidence of a recession call.
Naturally, this puts the coincidence level at 65% instead of the previous 83%. This is a literal take on whether there is a coincidence between the direction of the DJIA and when the NBER actually calls a recession or an expansion. It could be said that the DJIA follows the directions of the NBER except that the call made for the economy usually takes place at least a year after the fact.
Recession Length and Coincidence
Another method for measuring the coincidence of the DJIA and the official NBER definition of a recession is to rank the recession by length. In this case, we take the beginning of a recession and end of a recession and use the first trading day of that month and measure to the first trading day of the month when the recession is considered to have ended. Below is the ranking of the length recessions from shortest to the longest compared to the DJIA.
NBER peak | NBER trough | previous expansion (months) | DJIA |
January 1, 1920 | July 1, 1921 | 10 | -37.16% |
January 1, 1913 | December 1, 1914 | 12 | -35.81% |
July 1, 1981 | November 1, 1982 | 12 | 3.93% |
January 1, 1910 | January 1, 1912 | 19 | -16.25% |
September 1, 1902 | August 1, 1904 | 21 | -20.77% |
August 1, 1929 | March 1, 1933 | 21 | -85.01% |
May 1, 1923 | July 1, 1924 | 22 | -0.98% |
April 1, 1960 | February 1, 1961 | 24 | 5.42% |
October 1, 1926 | November 1, 1927 | 27 | 13.75% |
May 1, 1907 | June 1, 1908 | 33 | -11.32% |
November 1, 1973 | March 1, 1975 | 36 | -20.63% |
November 1, 1948 | October 1, 1949 | 37 | -2.97% |
August 1, 1957 | April 1, 1958 | 39 | -12.00% |
August 1, 1918 | March 1, 1919 | 44 | 6.03% |
July 1, 1953 | May 1, 1954 | 45 | 18.55% |
May 1, 1937 | June 1, 1938 | 50 | -36.65% |
January 1, 1980 | July 1, 1980 | 58 | 5.78% |
December 1, 2007 | June 1, 2009 | 73 | -34.50% |
February 1, 1945 | October 1, 1945 | 80 | 19.15% |
July 1, 1990 | March 1, 1991 | 92 | 0.37% |
December 1, 1969 | November 1, 1970 | 106 | -5.84% |
March 1, 2001 | November 1, 2001 | 120 | -11.35% |
In this perspective on the coincidence between recessions and the performance of the DJIA, we can plainly see that there is a 63% coincidence. Overall, not a bad amount of coincidence. However, we think that we can generate an outcome that is closer to 100% coincidence if we twist the data to fit our agenda.
There is a saying that “the stock market is a leading indicator for the economy.” We promise we didn’t make this up. Furthermore, we have quoted the venerable Richard Russell of Dow Theory Letters fame to prove our point.
"The stock market is an indicator for the economy, a leading indicator (Russell, Richard. Dow Theory Letters. October 4, 1967. page 2.).”
"Just as [Elliot] Janeway senses new leading indicator of the business-market condition, I too, often sense an index which I feel should be accorded great authority. Right now I would say it is world stock exchange averages (see last Letter). The leading stock markets of the world are now heading down in earnest (statistics in Barron's each week), and this has an ominous ring to it (Russell, Richard. Dow Theory Letters. August 29, 1973. page 6.)."
"...if you believe that the market is its own best leading indicator then you have to believe what this market is saying (Russell, Richard. Dow Theory Letters. September 19, 1984. page 2.)."
"I continue to remind my subscribers that the crucial issue here is NOT whether the CPI turns up or down next month, it’s NOT whether the leading indicators blip up or down in July. No, the critical issue here is the direction of the primary trend of the stock market (Russell, Richard. Dow Theory Letters. June 8, 1994. page 2.)."
For nearly 6 decades, Richard Russell impressed upon his readers that the market leads the way when it came to understanding the direction of the economy. Naturally, William Peter Hamilton, fourth editor of the Wall Street Journal, had the following to say about the insights of the stock market:
“The market is not saying what the condition of business is to-day. It is saying what that condition will be months ahead (Hamilton, William Peter. The Stock Market Barometer. Harper & Brothers. 1922. page 42.).”
Not to be outdone, Charles H. Dow, co-founder of the Wall Street Journal, has the following to say about the stock market as a leading indicator:
“The stock market discounts tendencies. Stocks went up before the improvement in business became pronounced. Stocks will discount depression before depression actually exists, but this discounting quality in stocks make them run to extremes. They discount shadows as well as substances and often anticipate that which does not occur (Dow, Charles H. Review and Outlook. Wall Street Journal. May 10, 1900.).”
We have spanned over 100 years of claims that the stock market is a leading indicator for the economy. If this is true then we can then surmise that any of the years where the NBER called for a recession, the stock market had already embarked on a meaningful decline and if the data somehow shows a gain in stocks from a peak to trough period then it is because the decline and subsequent recovery was already in place.
Let’s see if the years when the DJIA registered a gain in the period from peak to trough of a recession was already preceded by a decline in the Dow Jones Industrial Average.
Evidence of Market Coincidence preceding Economic Reality
NBER peak | NBER trough | DJIA date | DJIA peak | DJIA date | DJIA trough | % change |
July 1, 1981 | November 1, 1982 | 4/27/1981 | 1,024.05 | 8/12/1982 | 776.92 | -24.13% |
April 1, 1960 | February 1, 1961 | 1/5/1960 | 685.47 | 10/26/1960 | 566.05 | -17.42% |
October 1, 1926 | November 1, 1927 | 2/11/1926 | 162.31 | 3/30/1926 | 135.20 | -16.70% |
August 1, 1918 | March 1, 1919 | 6/8/1917 | 98.58 | 12/19/1917 | 65.95 | -33.10% |
July 1, 1953 | May 1, 1954 | 1/5/1953 | 293.79 | 9/14/1953 | 255.49 | -13.04% |
January 1, 1980 | July 1, 1980 | 2/13/1980 | 903.84 | 4/21/1980 | 759.13 | -16.01% |
February 1, 1945 | October 1, 1945 | 3/7/1945 | 161.52 | 3/26/1945 | 152.27 | -5.73% |
July 1, 1990 | March 1, 1991 | 7/19/1990 | 2,993.81 | 10/11/1990 | 2,387.87 | -20.24% |
Of the eight periods when there was a positive change in the DJIA within the defined NBER recession, five of them had already experienced a decline and recovery which explains why there was a positive result in our initial review.
The remaining three periods declined after the NBER recession had already started. However, each of the three DJIA troughs occurred before the end of the NBER trough. In this respect, even in failure, the stock market managed to fulfill half of the market bromide. This means that 93% of the dates provided by the NBER since 1900 for both recessions and expansions were led by stock market changes in conformity with the later call in the economy.
Conclusion
In our simple coincidence evaluation, we found that only 17% of the periods did not conform to the idea that stock markets coincide with recessions and expansions. Somehow, all available data suggests that expansions in the economy are perfectly aligned with stock market increases.
When ranked by the length of the recessions, there is a clear majority of recessions that align with declines in the DJIA. However, the minority of recessions that show DJIA gains is somewhat confounding.
However, when we recognize that the stock market is a leading indicator for the economy, we find that the remaining 17% that don’t conform to the theory that the stock market is a leading indicator for the economy shrinks to 6.52% when accounting for the fact that market gains during a recession result from the market having recovered in advance of the recession low.
Posted in Charles H. Dow, DJIA, NBER, recessions, Richard Russell, William Peter Hamilton
Unemployment Rate: August 2018
On April 6, 2018, we said the following:
“As we approach the 3.80% level, it should go without saying that all the signs are in place for an overextended economic boom.”
Just look at the data, the last time the unemployment rate was below 3.80% was way back in 1969.
From where we stand, it appears that the direction for the economy is to one extreme or the other. No longer do we think there will be the gradual sloping (gradual relative to what is coming) to the upside in GDP, stock market and real estate prices. Either a bubble phase or a bust phase.
Unlike the many critics of the stock market and economy who are always saying that we are in a bubble simply because the trend is up, we have clearly outlined the parameters of what a bubble is within the context of the market conditions. What has been experienced in the economy and the stock market from 2009 to the present has been a normal reaction to the crushing decline from December 2007 to March 2009.
Posted in recessions, Unemployment
Unemployment Rate: April 2018
In April 3, 2017, we said the following:
“All that is left is for the unemployment rate to fall to 4.40% and 3.80%. What is the constant challenge to any rising or declining trend? Getting old and tired. The manifestation of the declining trend getting old and tired is best represented in the percentage rate of change over the previous year. When the trend starts on the path of a decelerated rate, you have a fair idea of what is coming.”
So far, the unemployment rate has declined to 4.10%, an average of the 3.80% and 4.40% that was anticipated last year. It is no monumental feat to suggest that the unemployment rate could decline from the level of 4.80% to 4.40% in 2017. However, is something else to suggest that the unemployment rate could get down to 3.80% when it was hovering around 7.50% on July 26, 2013.
Our unvarnished assessment of the unemployment rate in July 2013 was as follows:
“It is important to understand that the 10% and 3.8% unemployment rates are undesirable scenarios. The 10% unemployment rate is in the depths of a “recession” and the 3.8% unemployment rate at the height of a overextended economic boom.”
As we approach the 3.80% level, it should go without saying that all the signs are in place for an overextended economic boom. Eight years of economic recovery without a recession indicates that a recession is due. Below, we attempt to estimate the timing of the next recession based on our April 3, 2017 unemployment review.
Dow Declines in Recessions
Below is the data of Dow Jones Industrial Average declines in the period indicated as a recession according to the National Bureau of Economic Research (NBER) from 1902 to 2009. The percentage change is arrived at by taking the first trading day of the month indicated as the beginning of a recession and the last trading day of the month indicated as the end of the recession.
Posted in NBER, recessions
Industrial Production Index In Decline
As of November 2014, the Industrial Production Index* has been in a declining trend.
The beginning of the rising trend was established in June 2009. When looked at from the percentage change over the previous year, there has been been only six out of 17 times when the Industrial Production Index had a negative declining trend AND a recession was not called by the National Bureau of Economic Research (NBER).
Posted in Industrial Production Index, NBER, recessions
Earnings Recession Over?
The chart below outlines the Year-over-Year (Y-o-Y) percentage change in the S&P 500 earnings since 1960. From what we can tell, the slide from the 2010 peak in Y-o-Y earnings in the S&P may have bottomed in 2015 and is on a path to the 2013 peak which could be followed by the 1964 recovery peak.
What stands out about the current move upward is the fact that the decline went into negative territory. While the decline wasn’t as low as we’d like, at or below the 1970 level, we have to accept that there are few times this indication went negative without a very strong recovery to the upside. For now, we’re hedging our commentary by watching for the 2013 level before going on to the 1964 peak.
However, we suspect that the recovery in S&P earnings could test the 1976 peak. What does that translate into for the stock market. Although not as low as the 1975 trough, the Dow Jones Industrial Average nearly doubled within a two year period. Let’s call for a +50% increase in the Dow Jones Industrial Average from the 2015 low. This would bring the index to 24,153.57 by 2018.
Resource Links:
Posted in Dow Industrials, Earnings, recessions, S&P 500
New Low Team Beats NBER to the Punch
Posted in bull market, Dow Theory, NBER, recessions
Robert Rodriguez Review: September 1994
“The Fed has shifted to a tighter monetary policy. Interest rates are rising while inflation fears are growing. Will these factors lead to a possible recession in 1995? All are situations that most investors have faced before; therefore, they have created a longer period of investor uncertainty.”
“In this type of an environment, an individual stock’s characteristics tend to play a greater role than any one single event. Stock picking has a potentially higher probability of being a successful strategy and this is where we feel our strength lies.”
“Thank goodness we focus on individual stocks rather than trying to forecast the stock market. The former is far more rewarding and predictable.”
- Hand wringing over the threat of recessions helps to create value in the market.
- Individual stocks, not funds, have a greater probability of generating higher investment returns.
Comments Off on Robert Rodriguez Review: September 1994
Posted in recessions, Robert Rodriguez, Value Investing
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