Reflections [Expanded version]
A new coronavirus wave is starting in USA
One of the most accurate and reliable leading indicators we have discovered for the U.S daily new Coronavirus infections curve is the percentage of 52 US states that have an increasing or decreasing rate of new daily infections being reported. This indicator tops out before the national US infection tally and likewise bottoms before the national US infection tally. It is thus an early warning indicator for change in direction of the daily new infections curve.
The percentage of US states with rising daily infections fell rapidly from 50 (achieved 8 days before national daily infections peaked) to almost zero as lockdowns and stay-at-home orders came into affect. It is even likely that vaccination programs contributed somewhat to the decline. However, over the last few days, this tally has jumped from 4 to an astonishing 23 states with rising daily 7-day average infection rates:
It is highly likely that the third major coronavirus wave in the US has bottomed out and we are set for the start of a new fourth wave of infections. We do not have hard data to assist with determining whether the 4th wave will be as large or larger than the 3rd, but the assumption of ongoing successful vaccination programs likely means that the 4th wave will be a lot smaller.
The chart above shows us that large jumps in the metric are normally when we emerge from lockdowns or major holidays, as depicted by the blue line which is a geolocation based economic mobility index. When economic mobility comes out of a steep dip, the black line rises rapidly as increased human interaction raises infections. As you can see we are emerging from a recent steep dip in economic mobility, created by the Presidents Day holiday that was used as a long weekend. The prior big dip where this phenomenon was witnessed was Xmas/New Year, the one before that was Thanksgiving, and the one before that was Labor Day. In each case, the national tally of daily new cases (brown line) rose dramatically afterwards.
- The last big coronavirus wave has bottomed out
- Economic mobility is going to rise as we emerge from Presidents day holiday effects
- The number of states with rising daily infections will likely continue to shoot up
- The US national tally of daily new infections is going to rise dramatically, vaccinations notwithstanding.
Launch of Institutional Crypto Advisory
After hundreds of client Zoom consultations over the last 6 months, the request for a fundamentally-driven macro-risk model for cryptocurrency (specifically Bitcoin), similar to the ones we provide for the US economy and SP500, was one of the many topics topics among just under 49% of the calls. The request was highest among high net-worth private investors, family offices and small funds, but we expect company treasurers and larger institutions to become more formally involved with Bitcoin as a possible hedge against dollar depreciation and inflation.
Fortunately we have over five years active experience with Bitcoin and Ethereum, having been involved when BTC was still $900 in late 2016. What was a small 1% exposure built up over late 2016 to early 2017, has ballooned to over 10% during this time, meaning we have a very active interest in monitoring macro-cycles and risk models associated with the cryptocurrency. Whilst we were surprised at how many of our clients have, or are planning exposure to Bitcoin (either in their private or formal capacity) we are delighted to share with them the fruits of our five year journey.
The Crypto Advisory has been designed for large investors, family offices, company treasurers and fund managers who are exposed to Bitcoin (either through direct ownership or Trusts such as Grayscale) and seek institutional-grade macro-level, fundamentally-driven risk and valuation models. The charts and models displayed here are what we have developed over the last 5 years for our own crypto investments and currently deem to be the most important items to track and measure macro risk/opportunity for cryptocurrency.
The models are a mixture of supply/demand metrics, valuation, regression and pricing models, as well as cyclical factors. All data used are a mix of on-chain analytics (data taken directly from the blockchains themselves), futures markets and exchange pricing data.
The Crypto Advisory is provided as standard with our most basic subscription and thus also includes unlimited in-person consultancy (via Zoom) with our crypto analysts to allow any private investors, family offices or institutional clients to jump start their crypto operations or to sanity check their existing ones. Expertise can be provided regarding what wallets and exchanges to use, which crypto-assets to focus on as well as what additional tools may prove useful.
Stage is set for stock market gains in November
The SP500 has put in a 7.4% peak-to-trough correction since 12 October.
In the last 20 years, according to our SP500 probability model, corrections of more than this magnitude have occurred only 11.4% of the time, hinting at a 88.6% probability the worst is over.
The SP500 has also put in lower weekly closes 3 weeks in a row. Additional lower weekly closes have only occurred 15.9% of the time in the past, implying a 84.1% probability the worst is over.
The VIX has jumped to levels only exceeded 8.4% of the time, implying a 91.6% probability the worst is over.
The correction has endured 15 sessions, with longer corrections witnessed only 17% of the time, implying a 83% probability the worst is over.
These 4 measurements imply we are close to having seeing the worst, according to the historical record of price action.
Further conviction for a positive month in November comes from the Seasonality Timing Model (STM) where the Composite Seasonality Score (which examines long-term historical record of monthly gains, positivity rates and gain/loss ratios across 4 different seasonality cycles) is 74.0, just under the extremely bullish threshold that encourages leverage due to high incidence of positive outcomes:
Given the large correction we saw over the last 2 months, this prediction is much more likely to come into play. It is not often we see 2x LEVERAGE levels on the seasonal forecasting models coupled with a prior 2 month or longer correction of 7% or more. In 90% of the cases the seasonal forecasts prove accurate.
Even if we were concerned about the effects of the current election on outcomes, we can examine the 4-year Presidential Cycle model for cues on this particular Novembers’ performance. This model has been out-performing the 1,2 and 3-year cycles over the last decade:
On the whole, across the 1,2,3 and 4-year seasonal cycles, as well as the composite model, the upcoming 3 months of November, December and January are forecast to be statistically bullish.
The easiest way to cue your market entries, if you are following any (or all) of our 12 market timing models, is to simply examine the SIGS signal composite for the first two or three BUY signals to appear. The bottom signal composite line will jump from -12 (all bearish) to a higher reading as the first models start going bullish:
The SIGS composite is available from the “SP500 Signals” tab in the Charts Dashboard.
You can also go and examine further detail for the next 3 months in the Seasonality Timing Model in the “STM” tab in the Monthly Charts menu.
A new, bigger U.S Coronavirus peak now likely
The U.S lags most of Europe’s ‘ countries by about 4-6 weeks on the coronavirus curve. When we saw the infections picking up in Europe after lockdowns had been eased, we wondered if the US might be able to dodge a bullet, but sadly it appears a new wave of infections is now upon America as we follow the same path as those countries in Europe that were ahead of the US curve:
Particularly alarming is Italy – you will remember the horror stories coming out of Italy in the lead up to its peak, and it looks like they are set to shoot past that peak. The United Kingdom has simply blown past the old peak as has Spain.
Given that many developed countries (that had massive waves of infections they managed to suppress) are now surging past their prior peaks, it is wishful thinking to assume the U.S will not follow suit.
The reasoning for this is simple – deep suppression of daily caseloads, leads to relaxation of stay-at-home orders and lockdowns, which leads to increased mobility and social contact, and gradually a slippage in population diligence, caution and due care. Given that not one country is even close to herd immunity, the outcomes are predictable.
The below charts show that among the 40 largest economies in the world, economic mobility as an aggregate has stalled for some time now and almost 40% more countries have rising daily infections than those with falling infections:
To this end we need to prepare to exceed the U.S daily new cases peak of 67,000 and prepare for this to move close to 100,000 new cases per day.
Without a doubt that is going to lead to more stay-at-home orders and lockdowns, even if not as harsh as the initial ones, and it is going to have a huge hit on U.S Economic mobility, which as we have shown, is running comfortably north of 0.9 r-squared to other weekly leading economic indices and is an excellent proxy for measurement of economic conditions.
In a nutshell, we have not seen the worst of the Coronavirus epidemic in the U.S and the “main peak” is yet to come, with the economy likely taking a hit.
The U.S economic rebound has already stalled according to a broad measurement of high frequency data:
The resurgence in daily new coronavirus cases is not isolated to a few states. We have the number of states in serious trouble (within 20% of their daily peaks) climbing from about 10 to almost 30 now. The number of states that had managed to bring the virus under control (less than 33% of their daily peaks) has dropped from 12 to just 7 now.
The next U.S president is going to find themselves in uncharted waters shortly after being inaugurated and its difficult to see how economic mobility, and thus the economy, can break out of its current recovery plateau. In the prior (2nd) infection surge, economic mobility flatlined, so we should expect nothing less. In fact, it is not improbable that the recovery pulls back somewhat against a backdrop of a 3rd surge.
The road to immunity, herd or vaccine, is likely to be a rocky ride well into 2021.
Coronavirus Recession likely ended in June
In this exercise, we examine the current behavior of various of our US leading economic indexes to past history to determine a likely recession exit date.
The charts we display below are automatically displayed (depending on your selections) in the monthly data file Analysis Tool that is published for PRO subscribers, and can be found in the new RECOVERY sheet in the Excel workbook.
We start with our oldest and most widely followed index, the Weekly Leading SuperIndex:
Let us examine the behavior of this index around the prior 7 recessions and then align the current 2020 vintage trough (lowest point) with the trough of the average of the prior 7 vintages to determine the most likely month we exited from recession:
We see from the above chart (taken straight from the one produced in the RECOVERY tab) that the average of the prior 7 SuperIndex vintages troughed 3 months before the first month of the new expansion. The red line in the current SuperIndex vintage (last point representing September 2020) is aligned to this trough. This implies September 2020 represented the 2nd month of the new expansion, meaning the recession likely ended in July 2020.
NOTE : It is important to understand that the current vintage represented by the red line, is time-shifted so that its trough aligns with that of the average of the prior 7 vintages. This means its timing relationship with the current recession and prior vintages is meaningful to the right-hand-side of the trough only, and you cannot use data to the left of the trough to compare the current vintage to prior ones.
Let us repeat the exercise with our 2nd most popular leading economic index, the high-frequency US Weekly Leading Economic Index (WLEI):
We repeat the exercise again for our third most widely followed index, the 21-factor US Monthly Leading Economic Index (USMLEI):
We can use the monthly data file to select any number of our 15 models, to create a composite and repeat the above exercise. For example, our Recession Forecasting Ensemble (RFE-6) consists of six different models taken from the SuperIndex report . The RFE is very widely followed by SuperIndex readers, since it has a zero false positive real-time history when using more than one model in recession as a overall recession trigger, when examined as a ensemble (a count of number of models flagging recession):
The RFE-6 is arguably our best performing model when one considers its zero false positive rate, ideal “golden” lead-time of 1.5-2 quarters (See Recession: Just how much warning is useful anyway?) and lowest coefficient of variance (high consistency of lead times):
Let us finally mash up all 15 of our models together into a single super-duper composite which we call RFE-15, which encompasses 4 coincident models, 3 short-leading models, 5 medium-leading models and 3 long leading models. Here is the ensemble (or diffusion of models in recession) with optimum trigger of 3 producing the lowest coefficient of variance (CoV)
In summary, we have estimates ranging from May 2020 to July 2020 for the end of the current recession, with June 2020 the most likely candidate.
The real issue for us moving forward is not if we have emerged from recession or not, but if the recovery can maintain a steep slope and for how long the recovery can continue without faltering. All signs (here, here and here) point to a softening again of the economy in Q4-2020 and discussions of a double-dip recession may well resurface as a result.
Summary of Service Additions & Improvements
We wish to highlight the following recent additions and improvements since April 2019, to our subscriber deliverables, as well as highlight some older features you may not be aware of.
2. Stock Market reports
3. Weekly charts
The WEEKLY LEADING INDEX is our highly popular Weekly Leading Economic Index (WLEI) compared with our most popular index, the Weekly SuperIndex and the ECRI WLI for comparison. PRO subscribers can also download the historical data in Excel and view a chart of all six the WLEI components from here:
The US Yield curve diffusion is widely followed among our institutional clients:
The GLOBAL MOBILITY chart tracks the GDP-weighted economic mobility of the 24 largest economies in the world, to assess the global recovery
4. Monthly Charts
There is a new menu page that groups all monthly updated charts together.
The GOOGLE chart shows our proprietary multi-factor Google Trends recession monitor:
The YELLEN chart, also taken from our monthly Labor Market Report, shows the famous “Yellen Labor Indicator”
The WORLD LEI-1 tab shows our Global Economic Leading Index together with its preferred leading growth metric, the number of countries with rising LEI’s. This is taken from the comprehensive Global Economic Report:
WORLD LEI-2: just shows the 22-factor RecessionALERT Monthly Leading Index (USMLEI) together with the World LEI growth metric. This is very useful as the Global LEI growth metric actually leads the US Monthly Leading Index:
The VIX/YC chart updates a chart produced from one of our most popular 2019 research notes : “Impact of monetary policy & Yield Curve on future volatility” This research note was rather prescient in that it was penned a few days before the VIX exploded upwards, and we continue to track the phenomenon to completion in this chart:
USMLEI PROBS tracks the 4 main probability models derived from the monthly published US Monthly Leading Economic Index (USMLEI). The models are discussed in this research note and provided 7 months warning to the current recession:
MCMHI is merely a monthly chart of the Composite Market Health Index (CMHI).
STM are all the detailed charts from our Seasonality Model, the performance of which is shown below. We see that the 4-year cyclical model is performing very well, but our proprietary Composite Seasonality Model is performing even better (red line in bottom chart)
5. Projects Workbench Menu
When spending many months researching and building new models we often reach a point where the model is “nearly good enough” or in “Beta” and we run it out of sample for a few months to see that things are working as they should, or to experience the model live first hand to work out if any improvements are required. Rather than have these models hidden in our laboratory, we post them here so that clients can share the final testing and refining process with us. Once models have undergone this “live testing”, improvements and client feedback, we normally then embark on the full documentation before making it available as a production model. As these are Beta models, you are advised extreme caution in using them. Note that the models could change at any time as we make refinements during this process.
…and our 7-factor weekly updated WPCERT which you can read about here:
6. COVID-19 & Economic tracking enhancements
The USA MOBILITY-2 tab tracks the same states using this innovative alternate methodology that uses total infections on the x-axis (instead of date) and also shows Rt (reproductive rate) figures:
STATE BREADTH tracks US state daily infections and mobility as well as breadth metrics of these (number of states with increasing daily infections and number of states with decreasing economic mobility):
G24 COMPOSITE tracks the 24 largest economies as a single global GDP-weighted economic mobility composite together with daily infections and some interesting breadth metrics, to allow us to gauge how the overall world economy is shaping up:
7. QQQ Probability Model
PRO subscribers now also have access to detailed, daily updated market trough and market peak probability models for the highly popular Nasdaq-100. The methodology used to compute these probabilities is the same as the one used for SP500, VTI, EFA, EEM, IJH and AGG – described in this research note:
There is now a DASHBOARD menu that summarizes many poplar market timing and macroeconomic models in our stable. The SP500 SIGNALS tab tracks the current status of our market timing models. It also provides direct links to the detailed charts (as pop-up images) we maintain on each of the models:
RAVI FORECASTS shows how much headroom we have to various SP500 future targets based on the forecasts made by the RecessionALERT Valuation Index (RAVI)
The next two tabs track many of our models via easy-to-use gauges. You can view the details about these gauges here, but we do a brief summary below.
PROB MODELS & LIQUIDITY on the top-row shows the state of the peak/trough probability models for the various ETF’s together with direct pop-up links (B=Bottom, T=Trough and C=Combo Chart) to the various charts if your subscription level allows it:
On the bottom row it shows the status of 6 of our most popular liquidity indexes together with direct pop-up links to their various charts.
US Economic Recovery update
NOTE : All the charts displayed below are updated daily/weekly and available for subscribers from the various chart menus.
Since the peak daily infection rate of over 75,000 achieved on 17 July 2020, daily infections fell consistently to a trough of just over 20,000 on 8 September 2020. During this period, US national economic mobility (Google workplace less residential mobility indices) climbed slowly as the economy attempted to get back to work. Since just after Labor Day however, the daily infection rate has picked up steadily to just under 50,000 across a broad swathe of US states, with over 40 states reporting increasing infection rates from a low of just 14 at the trough. Some 17 of these states are in serious trouble, as highlighted in red below:
Whilst the US’s large population size has resulted in her reporting the most infections and deaths among all countries, the actual death rate per capita is smack bang in the middle of the top-twenty countries by mortality (with populations more than 10-million) as depicted below:
Taking a peek under the hood at the eight largest US states by economic contribution, with over 51% of US national output, reveals that all but Illinois, Pennsylvania and Ohio have got their daily infection rates nicely under control and all states in this group seem to have increasing economic mobility:
The states ranked nine through sixteen by economic output, contributing some 18.4% of total national GDP, show that North Carolina, Virginia, Michigan and Maryland are struggling to convincingly bring down daily new infection rates:
Again, all states seem to be improving their economic mobility, some better than others. The difference however appears to be among how this is expensed against increased infection rates.
We can roll-up all the statewide data into a national US view, and compare among the eight largest economies in the world (excluding China whose numbers are highly suspect and for which no mobility data is available anyway), contributing some 49% to total world economic output:
Again, most countries are experiencing improved economic mobility, but with huge variances in costs in terms of infection rates. India is clearly the worst off with stagnating economic mobility and exponential increase in daily infections to just under 1-million der day! France and United Kingdom seem to be well into their second waves, with Germany and to a lesser extent Italy potential problem areas developing.
Spain and the Netherlands are clearly in the grips of ugly 2nd waves of infection which have exceeded prior peaks, whilst Canada is in the early stages of a second wave, yet to exceed her prior peak. Indonesia is still in her first wave with the daily infections looking suspiciously like a exponential curve candidate. South Korea nipped her second wave in the bud whilst Australia has all but defeated her second wave. Russia appears on the cusp of a second wave whilst Mexico appears to be fighting to get her first wave under control.
Here are the world economies ranked seventeen through twenty-four, contributing some 5.7% to global economic output, where pain seems to be isolated to Poland, Belgium and Switzerland. Taiwan and Thailand seem to have infections tightly under control and their economic mobility is almost at pre-covid levels as a result:
We can now finally roll up the data for all 24 of the worlds’ largest economies, contributing over two-thirds of global economic output. Note that we produce a GDP-weighted economic mobility index in this exercise, to match current global economic conditions the closest:
Following a June to early August “economic flatline” it appears that the global economy is picking up her skirts to run again, posting decent gains since mid-August, and posting new all time highs above -30% from pre-covid levels. It is interesting to note that the G24 group excluding US appears to have a slightly more improved economic mobility curve than the US, but that this is coming at the expense of daily infections, since US daily infections are decreasing from the 2nd wave whilst the other 23 countries, as an aggregate, have their infections still increasing in what appears to be the first initial wave.
Whilst there is always room for improvement when it comes to lives lost, it appears the US may not be faring as bad as some of the media is making out. There are certainly a lot of populous countries and even some developed ones that are faring worse. There are a lot of things moving in the right direction with the US pandemic response, and as depicted below there is still some room for improvement on a few metrics:
We can look beyond just mobility metrics and geolocation data when tracking the current US economic recovery. Here is a U.S 7-factor high-frequency economic recovery tracker we maintain for clients:
What has been interesting to observe is the surprisingly high (for us at least) correlation of 0.75 to 0.94 (aggregate 0.92) between these “alternative high frequency measurements” and the more traditional RecessionALERT Weekly Leading Index (WLEI). Using all seven of these high-frequency factors together as opposed to just looking at economic mobility, shows a slightly more pessimistic assessment of the US economic recovery. The WPCERT composite is still below the peak registered on 26 June and some of the prints of the earlier available components hint at a slight decrease in the WPCERT composite in the ensuing two weeks.
It is safe to say we are likely to see a surge in daily infections in the US and some corresponding weakness in the economy in the coming few weeks. This lack of forward visible momentum is likely to present some tailwinds to the local stock markets and perhaps extend the duration of the current correction.
Our multi-factor trough probability model for the SP500 is showing that the current drawdown has only been exceeded 9.3% of the time in the last 20 years(implying a 90.7% probability of the worst being over), whilst the current duration has been exceeded 19.7% of the time (implying a probability of 80.3% of the worst being over.) The VIX has room to expand (having exceeded current levels more than 56% of the time) and we have some room for more support failures to shake investor confidence, with a probability of only 69%. However, we have seen 3 down-weeks in a row which has only been exceeded less than 10% of the time in the last 2 decades. The Demark Buy-setup count model is indicating a probability of only 79.9% of a bottom. All-in-all the average probability of a bottom from all six factors we track is just over 75:
Experience has shown that it is more prudent to assess the average of the top-3 highest probabilities from the six presented, together with a diffusion of the number of six models above 90% probability, when assessing buy-the-dip trading opportunity. These are both shown in the bottom pane. The current correction is approaching interesting levels but is not quite there yet.
NOTE : All the charts displayed above are updated daily/weekly and available for subscribers from the various chart menus.
Global Business Mobility remains in decline
Global Business Mobility, defined as GDP-weighted Google geolocation data of workplace less residential mobility for the 24 largest economies in the world, representing over two-thirds of global GDP, remains in decline despite a recent uptick:
When excluding USA from the data, the situation appears even worse, as depicted by the second chart above showing steeper decline of business mobility as well as a daily Covid19 infection rate that appears on the rise. This is due to the fact that the US business mobility is essentially flat-lined versus the other 23 economies that are mostly in mobility decline and the US has had a sharp decline in daily reported new Covid19 infections.
In fact all but two of the 10 performance metrics we track for the management of the US coronavirus outbreak are showing positive outcomes and we expect US business mobility to start its second-leg upwards shortly, especially as summer vacation comes to an end:
Additionally, the number of US states with decreasing mobility has declined to less than 5 and the number of US states with increasing daily infections has come down nicely from 45 to around 21 currently. This implies a broad-based improvement of the above 10 metrics:
Business related mobility remains an important aspect of tracking the Covid19 Recession recovery. Various mobility indices we monitor are actually showing a very high correlation to our Weekly Leading Economic Index (WLEI) which tracks mostly financial and labor market data:
You can see the full set of individual US State and country-level mobility/infection charts for the 23 largest economies in the world at the COVID-19 Menu in the US MOBILITY tab. The data has just been updated as part of the usual Thursday mobility charts update.
Global V-shaped recovery stopped in its tracks
The US State and G8 Mobility Charts have just been updated in the Covid menu.
As a result, US and state economic mobility has taken a huge hit. Although the US is only about 49% of the G8 GDP, there are enough G8 members also taking strain to stall the entire G8 group recovery. Since the G8 represent almost 49% of the world GDP we can assume the global V-shaped recovery has been stopped in its tracks:
There is a new menu item in the USA MOBILITY tab that allows you to view the G8 GDP-weighted composite as well as mobility of all G8 members together on one comparative chart. Just click on “See G8 Composite” as indicated below:
WHY IS ECONOMIC MOBILITY SO IMPORTANT?
There has been a lot of interesting research into the efficacy of high frequency geolocated mobility indices to represent economic reality. More specifically the new Dallas Fed Mobility and Engagement Index (MEI). Without much doubt, diminished mobility and engagement was a major factor in the slowdown in economic activity and the sharp rise in unemployment. The MEI bears this out with a high correlation to the Dallas Fed Weekly Coincident Economic Index.
Our Economic Mobility Index (EMI) which is workplace less residential Google mobility indices, and which we use in all our mobility charts, has a 0.924 r-square to our Weekly Leading Economic Index (WLEI):
We can therefore conclude that high frequency geolocation-derived mobility data is a good proxy for leading weekly economic conditions, given the severity with which mobility has been curtailed during the pandemic. Once we are back to “normal” less pandemic conditions (when mobility is back to pre-lockdown trend), there may not be enough movement in the mobility data to render them as useful anymore however.
This correlation is particularly useful to construct an index of global leading weekly economic conditions (as we have with the G8 composite) to track the global recovery, since there are not many (almost none) high-frequency leading indicators available for representing economic conditions on a global,continent or economic grouping (G8, G20, BRICS etc.) basis.
At this stage we might have to discard the V-shape recovery hypothesis and perhaps look to a Nike swoosh or W-shaped recovery for both the US and the rest of the world.
Headwinds increasing for the stock market
NOTE : All images and charts displayed below are regularly updated and available to subscribers from the CHARTS menu.
Unless more stimulus is unleashed (and a further $1.5-$2 trillion seems likely) the risks of a stock market selloff are high, especially given that the market is some 12.7 to 22% overvalued according to our RAVI US Valuation model (Also see our bear market warning to clients in June 2019):
The unlocking of the US economy has now led to a 2nd wave of infections and the US economic mobility index (an excellent high frequency proxy as an economic indicator) is rolling over and falling back to 45% of the pre-recession level:
The stock market will not take kindly to this if the rollover persists, and there is every likelihood it will persist, since (1) the economic mobility rollover is broad and covers most US states that matter to the economy (log in to see the next 8 largest economic contributors):
…and (2) the Covid-19 infection spikes are also occurring in most US states, meaning mobility will remain under pressure for a while:
The traditional high-frequency macro-economic data (WLEI2) has been rolling over in the last 2 weeks in sympathy of the economic mobility data:
Interestingly, ECRI’s WLI keeps increasing and is no doubt contaminated with out-sized improvements from weekly claims coming off unprecedented lows which is masking the other components in their series. Since our WLEI2 limits component movement contributions to within 2 historic standard deviations for this exact reason, it does not succumb to this issue.
From a seasonality perspective, the month of July is not very bullish with a score of only 23.8 out of 100 according to our Seasonality Model:
If there is indeed a correction in July, then this will set-up August for a high confidence bullish seasonal month especially for the Presidential (4-year) cycle which suggests a rare 2x leverage month in August. We mention this since the 4-year presidential cycle has outperformed all the other cycles over the last decade:
The risk/rewards are therefore skewed toward the bearish side in the near term and a 5-10% correction is probable unless the conditions we mentioned above change materially. On the positive side we fully expect any dip to be bought hard as undoubtedly the FED will issue another round of stimulus and nobody has ever gone broke by buying the dip on the back of the start of any new stimulus.
Do not expect any pleasant low volatility long-term rallies though. Literally 3 days after we issued a future increased volatility trend warning on the Long-term Volatility Prediction Model chart update on 17 Jan 2020, the VIX average has been rocketing upwards which is likely to persists to roughly early 2022 (with VIX peaking roughly 12 months earlier around early 2021):
US enters 2nd wave of Covid19 infections
Note : Most charts shown below are available to subscribers in the COVID19 analytics section.
- Economic mobility in US increasing at a slower pace than Covid-19 infections, contrary to rest of G7.
- At a state level, New York, New Jersey, Massachusetts & Michigan are leading economic mobility recovery vs infections.
- US has moved from a peaked scenario to join a host of second-wave countries struggling to contain infections after lockdowns.
- Stock market is going to struggle to post new highs until daily infections decrease again or FED resumes stimulus.
US versus rest of G8
Instead of using traditional economic indicators (most of which have a month or more delay) we can examine high frequency (weekly) data from the Google community mobility indices to try and figure out how economies are recovering. These indices use Android smartphones and Google maps requests to anonymously track movement trends over time by geography, across different categories of places such as retail and recreation, groceries and pharmacies, parks, transit stations, workplaces, and residential.
During lockdown, residential movement typically goes up and workplace movement trends down. To adequately track traditional economic activity, we can subtract residential movement from workplace movement to derive an Economic Mobility Index and represent this as a % of the pre-lockdown trend.
Instead of plotting the Economic Mobility Indices versus time, we can plot them versus cumulative infections to achieve a two dimensional view to gauge mobility improvement versus infections, as we have done below in charts comparing the US to the G8 developed economies which represent over 50% of global economic output.
The charts have been designed so that we can use the 45-degree angle line as a guide for how well we are doing. If the mobility curves are trending above 45-degrees, mobility is improving at a faster pace than infections, which is a desirable outcome. If the curves are trending below 45-degree angles then infections are outpacing mobility improvements which is a less desirable outcome.
We can see from the above chart that the US mobility curve is at a 19.4 degree angle which means we are not getting bang for our buck with the lifting of restrictions, as infections are outpacing mobility improvements. The UK at 43.1 degrees is faring much better, with infections marginally outpacing mobility improvements whilst Canada at 46.7 degrees angle has mobility marginally outpacing infections.
France, Italy and Germany are doing very well with angles in excess of 73 degrees. They are getting great bang for their buck by relaxing restrictions and there appears to be no post-lockdown “2nd waves” of infections.
Whilst the national US figures are interesting, we can see that outcomes on a state-wide level vary significantly:
Some explanations on the charts above will prove useful. These weekly charts of the 12 main US statewide epicenters contributing 70% of total US infections and 60% of total US GDP are designed to measure the pace of economic re-opening and recovery as well as provide early warning of a potential 2nd wave of infections that could derail the recovery in question and send the stock market into another tailspin.
- The LEFT vertical y-axis = 7-day average of workplace less residential Google mobility indices as % relative to pre-lockdown baseline.
- The RIGHT vertical y-axis = Rt reproductive rate – the average number of people who become infected by an infectious person. If Rt is < 1.0, virus will stop spreading.
- The horizontal x-axis = cumulative Covid-19 reported infections (in thousands, measured daily).
FOR THE BLUE Mobility curve:
- Flatter slopes < 45-degrees are less desirable outcomes and indicative of slow mobility recovery and/or increasing infection rates (infections rise faster than mobility)
- Steeper slopes > 45-degree angles are better outcomes characterized by rapid mobility recovery and/or decreasing infection rates (mobility rising faster than infections)
FOR THE ORANGE Rt curve:
- Flatter slopes less than 1 are more desirable outcomes and indicative of lower growth in disease infectiousness (less likely 2nd wave of infections)
- Steeper slopes more than 1 are worse outcomes indicative of higher growth in disease infectiousness (more likely 2nd wave of infections)
- Rt Slopes < Mobility slopes are highly desirable, meaning mobility is increasing faster than infectiousness.
ABOUT THE SLOPES:
- Slopes for mobility & Rt curves are represented as angles in degrees, with horizontal being 0-degrees and vertical being 90-degrees. Angles below horizontal are negative
- Angles are calculated as the slopes of the trajectories of the curves as defined by the last 14 days data points.
US states seem to be either doing really well or really bad. There are very few in-between.
New York, New Jersey, Illinois, Massachusetts & Pennsylvania are all performing exceptionally well with:
- mobility outpacing infections,
- mobility outpacing Rt and
- Rt less than 1
Michigan is performing reasonably well with mobility outpacing infections, mobility outpacing Rt but Rt greater than 1. This could fall back into a 2nd wave of infections.
Maryland & Virginia are performing “OK”, with Rt less than 1 but infection growth still outpacing economic mobility improvements.
All the other 4 states are performing badly with daily infections outpacing mobility improvements, mobility improvements marginal and Rt > 1.
Overall US Covid19 Scorecard
Apart from a few large states mentioned above, the US National Covid19 performance peaked a week ago and appears on the decline as it enters a 2nd-wave status. We track 10 metrics daily to score the US National Covid19 situation, with the latest status below:
Our highest 7-day average of daily score of 8.1 was achieved on 28 May 2020 and has been on a steady decline since as various metrics deteriorated.
The US now joins the “second-wave” club – countries where daily infections peaked, but then started growing again as lockdowns were lifted:
Regardless if you consider this wave still being the first wave or part of a second wave, the result is the same – US stock markets will struggle to continue posting higher highs and volatility will increase until one of two things happen:
- Daily infections peak again nationally or at least in the big 12 states we monitor
- FED responds to increased infections with more stimulus
NBER declares 2020 recession dates
The National Bureau for Economic Research (NBER) has announced official start dates for the 2020 US recession. It is very rare for such quick pronouncements (they are normally made 9-12 months after the fact) but the fact that 90% of the economy came to a sudden halt, has led to such deep declines in their metrics that they could make an early pronunciation without risk of being proven wrong later.
The monthly economic peak was declared as February 2020 (first month of recession is March 2020), while the quarterly peak occurred in 2019Q4 (first quarter of recession is 2020Q1).
Note that most of the media and press is interpreting this incorrectly, saying the US entered recession in February 2020. This is of course not true, the economy made a peak in February (its best showing this business cycle) and fell into recession in March (March was first month of contraction).
The NBER declarations are consistent with the dates we have been using in all our charts/reports since mid-April already.
Our first proclamation was made in the 17 April 2020 weekly SuperIndex PDF report and has remained unchanged since it first appeared, namely:
Since this date you would have noticed all NBER recession shading in reports and charts to have commenced in March for monthly frequencies and 1Q2020 for quarterly frequencies.
You can read the NBER declaration over here
We are estimating the economy to trough in May or June, but more on that later.
Some updates & market observations
The STM Seasonality Model is a unique composite that looks at average monthly gains, gain-to-loss ratios and percentage of winning months for 1,2,3 and 4 year cycles to arrive at a composite seasonality score for each month. For the last 18 months, the model has been running at 80% directional accuracy on calls on the SP500 future direction which is rather remarkable given the strange times we are living in.
Even though May month was forecast as a non-leveraged long month, the gains for May are not expected to be that large, in fact they could even be slightly down. It is the months of June and especially July that are materially bearish though:
The STM chart is updated with quite a bit of breakdown detail once per month with a 3-month look-ahead, as shown below:
You can read about the STM methodology at the following research note.
You will notice that all charts, data-files, dashboards and SuperIndex reports continue to be updated through Saturdays early morning (4am) and by no later Sunday 5pm US eastern time.
We are also now tracking the current Seasonality Signal, the Yield Curve Complex Diffusion and US Covid-19 situation in the new DASHBOARD page:
You will note from the above that 1 of the 10 yield curve aggregate components has inverted, moving us out of the SAFE zone. You can see from the Yield Curve Chart that it is the two less one year that has inverted:
You can read about this recession forecasting model in our August 2019 warning of an impending recession in this link .
Whilst our August note seemed prescient in penning in an earliest recession date of April 2020, we were hopelessly wrong on the severity of the recession, since this was triggered by an exogenous (black swan) shock followed by a voluntary hard stop of the majority of the US economy due to the Covid-19 global pandemic (which we warned of in first week of March 2020, before WHO). As we now know, this recession is anything but shallow, breaking all the historical records on just about any measure you care to look at.
While we are on the Covid19 topic we are now tracking the daily US Coronavirus situation in the dashboard gauges as well, and this just indicates the last pane in the COVID19 dashboard which is the score out of 10 :
At the moment, 8 out of the possible 10 metrics we track are moving in the right direction and as you can see the scoring metric has steadily climbed from a reading of two to well above 6 now.
SP-500 and Recessions
We examined SP-500 behavior in the lead to and during US recessions a few years ago in an old research note (Recession – Just how much warning is useful anyway?) to conclude that more than 5-months warning before a recession was not constructive, and that you should focus on recession warning models that stuck to a 4-6 month historical lead time as close as possible.
Given the “voluntary” sudden-stop of the U.S economy due to Coronavirus lock-downs, we are faced with an “artificial” non-systemic recession that was not caused by the usual financial imbalances, but rather an exogenous event. In such situations, leading economic indicators offer little hope of warning and are currently operating as coincident indicators.
The statistics still offer some useful guidance though, even if we acknowledge we are comparing a non-systemic recession to historical systemic ones. For example, the recent correction delivered a peak-to-trough decline of 33.92% versus the average month-to-month recessionary decline of 30%. However, the recent 23-session correction compares to the historical duration of some 13 months!
We examine the historical behavior of the SP500 around US recessions with seven metrics as shown below, using monthly closes (as opposed to daily closes where draw-downs would be higher):
- P2NBER is the amount of months taken from the SP500 peak to the first month of recession.
- DROP1 is the draw-down in the P2NBER period (monthly closes)
- NBER2T is the amount of months from first month of recession to the SP500 trough
- DROP2 is the draw-down in the NBER2T period. (monthly closes)
- DROP3 is the total peak to trough draw-down experienced. (monthly closes)
- T2EXP is the months from SP500 trough to the first month of expansion.
- RISE1 is the size of the rally from the SP500 trough to the first month of expansion.
The metrics appear below in tabular form:
We conclude, on average, that the SP500 peaks some 7 months (AVG) before onset of recession, but with a wide standard deviation (DEV) of 4.58 months. This means the stock market can peak anywhere from 2.6 to 11.72 months before recession. Total declines average 30% but again with a wide 15.4% standard deviation meaning any draw-down of 14.6% to 45.4% is statistically possible.
The statistics for the post-trough metrics have far less variances though. If we take the standard deviation and divide it by the average we get a Coefficient of Variance (CoV) which is a dispersion metric. The statistical dispersion for the post-trough metrics are far less than those of the pre-trough metrics, as you can see in the last row of the above table.
The SP500 troughs some 5.29 months before the first post-recession expansionary month, with a small 1.16 month standard deviation. This means the stock market can trough anywhere from 4.13 to 6.45 months months before the economy resumes expansion again.
We can do a fun exercise with these low dispersion metrics. If we deem the 23rd March 2020 SP500 low of 2,237 as the ultimate trough for this business cycle, then we could expect to emerge from this recession anywhere between July 2020 and September 2020 (averaged at August 2020), with SP500 trough-to-peak gains of 17.4% to 37% (averaged at 27.2%) This gives us SP500 targets of 2,626 to 3,064 (averaged at 2,845.)
Interestingly enough, these figures are not too far off the RAVI 3Q2020 forecasts as shown below, meaning such a rally would theoretically remain within “sane valuations” territory. Unfortunately, we have already rallied close to this point, meaning any small term pullback would be welcome. However, with the market following the “FED put” and unprecedented quantitative easing ( economy and Cornavirus be damned) we should not be surprised to see the market rally way beyond 3,000 in the near future.
We will soon see if the WLEI2, SuperIndex and USMLEI leading indicators trough around the July/August time-frame to confirm the above assumptions.
COVID19 Recession Warning
Businesses are going to be shuttered in massive numbers as the U.S has to deal with the unavoidable nationwide lock-down that will be required to contain the highly contagious Coronavirus. From our Covid19 Dashboard we maintain for our subscribers, we can see that the number of cases is rising according to a quadratic equation that will yield over 100,000 cases by the end of this week and over 500,000 cases by 7th April (assuming trends hold.)
Hospitalizations are running at 9% of cases and given that the U.S has an estimated 46,500 ICU beds (maybe double in a “wartime crises”) we estimate 50,000 hospitalizations by 7th April at which time the health system is going to be under severe strain.
Notwithstanding the humanitarian crises, the unavoidable global and U.S lock-down is going to hurt the US growth story very badly and in very short order. We predict over 2 million unemployment claims will be filed this week which is going to decimate the upcoming WLEI print as our estimation below shows:
This will be the first recession trigger for the WLEI since the global financial crises and subsequent recession of 2008. The Weekly SuperIndex (which is a pseudo weekly index with weekly and monthly components) is likely to follow within 2-3 weeks after that.
As we have stated before, when we have a sudden and dramatic stoppage of all economic activity due to a humanitarian crises (or any other exogenous event) then precious few leading indicators will provide adequate warning especially if no financial imbalances were present to raise recessionary concerns in the first place.
Apart from our Long Leading Indicator (US-LONG) in the US Monthly Leading Index report (depicted below)
…the only other warning we had was from the RAVI which warned in 2Q19 that the stock market was dangerously overvalued and started predicting negative returns ahead. As with most valuation based models, the over-exuberance could remain in place a lot longer than your short-positions could remain liquid, but what these valuation models DO provide is a danger signal for a fragile overvalued market that will not be able to handle an exogenous event. Lo and behold, we had an exogenous event against the backdrop of a highly overvalued market and the most brutal market collapse since the great depression ensued. But be clear that sans the Covid-19 exogenous event, the RAVI model could have had divergent forecasts with actual stock market outcomes for potentially much longer, since bear markets rarely commence based on valuation concerns alone.
Given the sudden stop of the economy, we are treating all our leading indicators as very-short to coincident economic indicators until further notice.
With most of the damage already done on the stock market (we could see another 10-15% down-leg, but RAVI is seeing upside so we are at least “moderately priced” now), we turn our eyes to using the leading indicators to anticipate a turnaround in the economy. One of these will be the stock market itself which in turn will be looking for signs of peak-infection in the US, and that is why we have focused charts for the US Covid-19 outbreak.
When hospitalizations, daily new cases, days-to-double and active sick (cases less recovered) numbers peak, we will have our cues the worst is over and the U.S is winning the war on Covid-19. Once the market sees that, odds are very high a new bull market may commence.
COVID-19 Global Pandemic is here
Further to our March 5th 2020 warning on a looming Coronavirus (COVID19) global pandemic, the WHO has finally recognized as such and declared the outbreak an official global pandemic. It is not hard to see why, when one looks at the chart below:
Whilst China has managed to stabilize new infections (assuming their numbers are to be trusted) the rest of the world does not have the luxury of their socialist command-and-control government, hospital building productivity, general mobilization, hive-mind population and draconian quarantine ability. And it shows with the infections spreading to over 125 countries at an exponential rate and more worryingly, rising mortality rates and falling recovery percentages. Within the next 3 days China is likely to represent under 50% of total cases. And remember, these charts just depict reported, confirmed cases – who knows how many are either under-reported or even unreported (as they are not known).
Governments are waking up a bit late but catching up fast with wide-sweeping quarantine measures announced on the hour across the globe. Schools and universities are being shut down, entire states and even continents are banning travel among one another, major sporting events are being cancelled, religious gatherings and general public gatherings are being banned, courthouses, theaters, cinemas, gyms, children playgrounds and nightclubs being shuttered by governments and large (even global) companies closing doors and asking staff to self quarantine and work from home.
Since this outbreak is likely to be with us for several months, potentially even forever (as with influenza) we can say without a shadow of a doubt that this outbreak is a once in 100 year event and our (out-sized) social reaction to its spread is likely to have a profound effect on the way we live and interact with the environment and each other – at least in the short term until we know more about it and/or a vaccine is found. It is also going to have a profound (but short-lived we believe) effect on every single economy of significance on the planet.
Despite the huge policy/media impact this virus is having across the globe, it is still in the little leagues when compared to other diseases humans have become used to living with. The (incomplete) list below shows the worlds’ deadliest diseases, sorted by their mortality (death) rates and also showing the number of estimated global deaths:
How does a disease with “only” 135,000 infections, relatively slow infection rate and less than 5,000 deaths illicit such an earnest response from us humans, given its lowly stature in the above list? Most likely its due to its newness (its what we don’t know about it that’s scary), lack of a known vaccine, its rapid spread compared to the more recent Ebola/SARS/MERS scares, its relatively high mortality rate and of course the prevalence of online and social media giving daily blow-by-blow accounts of the spread of the disease. Also, deep down, many people realize that this virus could be with us for a long time, just like the common flu which has been around for 2,000 years, and knowing how common and easy it is to catch flu, the fear of the unknown aspects of the disease coupled with the stigma of catching it and the uncomfortable mortality rates, are enough to send anyone heading for the hills.
If we look comparatively at the flu and Covid19 statistics, one cannot help but wonder if the current market reaction is overdone. In fact our policy and sociological responses to Covid19 are likely to cause more economic damage than the virus itself.
There are no leading economic indicators for these “black swan” events, but you can be assured it will have out-sized effects on most, if not all, our leading economic indicators, US and global alike. Whilst some US recessions are triggered by weak leading and co-incident economic data, there are a fair share of US recessions caused by an exogenous event such as this pandemic, when accompanied by US economic data that is weak and vulnerable or when valuations are stretched to the extreme – exactly the position we are in now.
For this reason, it is quite feasible that the U.S recession probabilities currently painted by any macroeconomic models (our most pessimistic, apart from the RAVI model, being 35-50% odds) could be shy of the realities of the exogenous event currently being played out. As most of the models are a snapshot of December 2019, with some January 2020 and the Coronavirus only catching the attention of the world late January 2020, we will only now begin to start seeing the probabilities catching up with the reality.
Apart from the RAVI Valuation model which was warning of extreme market risk and negative future equity returns as early as 2Q19, we are currently witnessing reactions in two other indicators.
1. The Weekly Leading Index (with the SuperIndex likely to follow suit in ensuing weeks)
2. The Composite Market Health Index (CMHI) – which has just dropped recommended exposure from 100 to 67%, as a result of the number of long term falling trends in SP500 now exceeding long term rising trends. New annual lows average is also set to overtake new annual highs average in the next few days which will signal a further 33% reduction in long term exposure:
Also note the upcoming Weekly CMHI is likely to make a print below 0.3, which also serves as a market warning, as per this research note.
Having said all that, the stock market correction is now at extreme levels (SP500 trough probability model > 95%, Great Trough (GTR) model, Selling Pressure Diffusion (SPD) model and the Zweig Breadth Thrust (ZBT) model) and out-sized reaction rallies are highly probable from current levels shortly. The speculators can take advantage of these when the signals come or the longer-term folk who subscribe to the thesis that all things economical are going to get worse from here can sell into the rallies. There is going to be a lot of selling into the rallies by speculators caught flat-footed in this steep decline (dare we call it a crash?), and traditional buy-the-dip strategies may therefore no longer be fit for purpose.
COVID-19 starting to look like a global pandemic
The newly reported cases of Novel Coronavirus (COVID-19) in China appear to be tapering off, but it is the recent uptick of newly reported cases outside China that have reached alarming levels, resulting in total cases accelerating to just under 100,000:
The secondary round of infections, most likely from travelers from China before the largest quarantine in human history, is evident when one looks at the progress in the number of countries reporting confirmed infections, with a marked jump since 23rd February 2020, to just over 90 countries.
The time-lapse between China and rest-of-world infections is worrying scientists that the virus has gone largely undetected in the rest of the world, particularly 3rd world countries with immature health infrastructure. This may be due to delays associated with travel propagation, up to 14-day incubation period compounded by no visible symptoms during incubation, and delays in country preparedness and detection capability. Granted, many countries are reporting less than 5 cases, but the ballooning of infections recently in South Korea, Italy and Iran (apparently 8% of Iran parliament is infected) give an idea of the potential scale of this disease in individual 1st and 3rd world countries alike:
It would be foolish to assume reported confirmed cases constitute 100% of the sample set, so its a question of how much is being unintentionally unreported and intentionally under-reported. There are those that estimate China has purposely under-reported infection by 10-fold or even more.
The percentage of cases from China has been dropping steadily to just over 84% as infections spread faster outside China:
Given that China represents just 20% of the world population, and giving China the benefit of the doubt that they have indeed now contained the virus and we can believe their reported numbers and they top-out at 90,000 infections, we can make a best-case assumption that a global pandemic could easily surpass 500,000 infections.
With the current mortality rate at around 3.4%, this could imply 17,000 deaths globally:
The worst case assumptions are too ghastly to contemplate with many scientists saying up to 40% of the globe could be infected, resulting in over 100-million fatalities.
For market watchers, the concern is the out-sized economic effects of fear, panic, quarantine (almost 300 million students quarantined worldwide now), collapsed travel and tourism, plunging industrial production and world trade volumes and cascading disrupted supply chains.
With the global economy having looked like it was just emerging from a business cycle downturn in December 2019, the COVID-19 outbreak could be a real economic recovery spoiler, as shown from charts taken from our detailed December 2019 monthly Global Economy Report:
Even if the U.S manages to avoid an outbreak, their economy will not. Prior research shows that US leading economic data and indeed even stock market returns, have much higher-than-expected correlations to global economic conditions outside the U.S.
Also, with monthly leading US data looking vulnerable and future US recession probabilities in the 28-52% range, the US economy may not have enough buffer to avoid a local recession with a protracted continuation of the current global business cycle downturn:
If you are interested in tracking the daily progress of this virus outbreak, the best place we have found is here. Just be careful not to read anything into the current days numbers, as they adjust dramatically overnight as they are invariably incomplete. The prior days numbers are the ones to focus on.
Massive rebound in US housing market
All 8 components of our comprehensive US Housing Market Index have posted solid and sustained gains in the last 6 months:
Our detailed PDF report for Dec 2019 has been published to the REPORTS menu.
According to many market watchers, there is no better barometer on the health of the U.S. economy than housing. It’s an industry that encompasses a myriad of vital sectors — banking, manufacturing, commodities, construction, durable goods, international trade, transportation and, of course, consumer spending. So it’s not surprising the Federal Reserve closely monitors housing trends in the course of setting monetary policy.
Sound economic growth in the U.S. is not possible without a robust residential real-estate market and in fact 7 of the last 11 declines in the housing market has led to economic recession and with 11 U.S recessions since the end of World War II, all but two were preceded by a big decline in the housing market.
Even though housing does not account for all that much of the economy, its role in recessions is huge, because it is highly cyclical and sensitive to interest rates. Housing has never accounted for more than 7 percent of total US GDP, but it has on average accounted for about a quarter of the weakness in recessions since World War II, according to a 2007 paper by Mr. Leamer titled “Housing IS the Business Cycle.”
After housing, the sector that has historically been second most important to recessions is consumer durables, or expensive purchases like cars, furniture and appliances. Those are often connected to the housing market’s prosperity because people usually buy other things when they purchase a home.
We found some worrying signs in labor data
These days, its really hard to find worrying signs in US labor data. If one looks at the once famous Janet Yellen Labor Dashboard, apart from Job Openings, everything looks to be progressing fine, bar a small pullback here and there:
Sure, the employment-to-population ratio (participation) has not come close to peak achieved in the last business cycle but everything else has.Even the equal-weighted 52-state US national average unemployment rate has been falling nicely to multi-decade lows. But dig a bit deeper and lift the hood on this state unemployment data and you get a shock:
An increasing number of U.S states, in some cases more than half, are reporting rises in their unemployment rates by the 3 main measures we look at, namely:
- net percentage of states with rising unemployment,
- percentage of states with unemployment higher than low of the last 6 months
- percentage of states with unemployment higher than prior month.
The rising of these breadth metrics are strong leading indicators for the future direction of the aggregate nationwide unemployment rate and whilst multi-year rises below 50% are common, such as we have witnessed from 2014 to 2019, it’s when they persist in greater than 50% territory that one starts to have serious introspection about the U.S economy.
We’re not there yet but this bears watching closely.
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U.S economy likely dodged a bullet
For two years, our comprehensive U.S monthly Leading Index (USMLEI) has been deteriorating, more recently to worrisome levels, with exactly half of the 23 components now in recession territory:
What was really alarming was that this was occurring against the background of elevated RAVI local stock market valuations, an inverted yield curve, a deteriorating Global LEI, a US housing market recession and a global trade recession.
We think the worst is likely over however. Notwithstanding a likely de-escalation in the US-China trade war and a massive $465Bn jump in liquidity via upcoming FED Open Market Repo Operations, all the other concerning factors bar valuations seemed to have turned corners.
Let us get to the elephant in the room first however – US stock market valuations. Our most accurate 1-year ahead forecast on the SP500 total return comes from the average annualized RAVI forecasts from the 1,2 and 3-year forecast models. This is forecasting muted short-run gains ahead for the SP-500:
This is the only model remaining bearish – however if you look at the prelude to the last two recessions you can see that a r-squared of 0.47, whilst remarkable for such a short run indicator, does not preclude the actual outcomes from diverging from the forecast for 1-3 quarters. The Sept ’06 scenario is a case in point. But for now, we have to be prudent and acknowledge that the current RAVI valuation model is not supporting favorable US stock market outcomes in the year ahead.
Next up is the yield curve inversion, which has for all intents and purposes UN-inverted after a short 10-week stay below zero:
As we have stated several times in the recent past, we were never convinced at the completeness of this inversion since at most 70% of the term-spreads inverted and history has shown that 90-100% need to invert before we can be assured it is a proper recession signal. Most importantly, the 10’s LESS 2’s failed to invert at all. We remain behind the hypothesis that we could likely be witnessing a false (incomplete) inversion as witnessed in 1999 as depicted in the chart below:
Next up is the all important Global LEI, more specifically the percentage of OECD countries with rising LEI’s, which improved considerably in October:
The hypothesis is that the direction of the blue line dictates the direction of the USMLEI and that the collective direction of LEI’s of countries outside the US can lead direction of the US leading data (see this note). We would be seeking a further improvement in the blue line for the month of November, potentially even a rise above 50% to signal a rebound in the leading US index.
Next up is the US Housing market which has staged a sharp recovery from a short recession and is a long leading indicator for the US economy. The theory is that there is no better barometer on the health of the U.S. economy than residential housing. It’s an industry that encompasses many vital sectors of the economy such as banking, manufacturing, commodities, construction, durable goods, international trade, transportation and, of course, consumer spending:
Finally, we can take some encouragement from the high-frequency leading data, where our Weekly Leading US index has been rising sharply of late – the theory being that this almost always leads to the Weekly Leading Super-index and Monthly Leading Index following suite:
There are very few guarantees in this business, just probabilities and likelihoods – and a betting man might conclude that things will be improving for the leading US economic data in the near future. There are a lot of tailwinds to support this theory at this juncture.
It is probably safer to be betting for the economy rather than against it right now.