How Much Recession Warning Did You Expect?

Mish

How often have you heard the stock market looks a year ahead of a recession?

Stock Market is Not Forward Looking

A widespread myth persists that the stock market is a leading indicator of recessions, providing a year or more warning on average before one starts.

Actually, the stock market is a coincident indicator of sentiment towards stocks, no more no less.

The stock market sees ahead myth stems from Wall Street pimps who want you in the market 100% of the time or they don't make money.

2007 Recession Trigger

The stock market peaked in November of 2007. Recession started in December of 2007.

What was the 2007 recession trigger?

There was none, at least one that people can easily point to. More accurately, sentiment changed and that was the trigger. The pool of greater fools willing to buy houses ran out.

Conditions rapidly changed from people standing in lines wrapped around the corner to enter a lottery to buy a condo, to no one in line at all.

The change happened in a week in Florida then rapidly spread through the country with agents touting "this market is different" until the entire country was engulfed.

2020 Trigger

People are already blaming the coronavirus.

Yes, it was a trigger. No, it is not to blame.

This recession was baked in the cake long ago, running solely on fumes of Fed stimulus then Trump tax cuts.

Price vs Earnings Estimates

Image from FactSet, anecdotes mine.

Anatomy of a Bubble

That's the anatomy of a bubble and the coronavirus had nothing to do with it.

Moreover, earnings estimates are horrendous at the top. So despite the decline, stock are still not cheap.

It will take another 20% decline from here before we can begin discussing cheap.

Guess what?

Bubbles burst. The coronavirus no doubt accelerated the decline and kicked off a recession, but Fed-sponsored bubbles sew the seeds of their own decline. That is the true cause.

Recession Has Begun

I am confident a recession has started or will start within a month. This shock was that severe.

Cruise ships cancelled, NBA and NHL cancelled. The local businesses and bars around those hotshots will suffer.

There are supply chain disruptions everywhere.

The stock market decline will put a dent into boomers buying cars, taking vacations etc.

The demographics are poor. Downsizing and retired boomers wanting to sell their homes will not find millennial buyers.

Trump was good for the market. It hasn't priced in Trump losing, and a recession coupled with his poor handling of the coronavirus will do it, no matter how quickly the coronavirus pandemic cools. Lost wages and profits are gone forever.

Denial

There was strong denial in 2007 regarding a recession.

Bernanke proclaimed in March of 2008 there would not be a recession. It had already started 3 months prior. He also told Congress there was no housing bubble to bust.

Is the same happening now? I think so. The Atlanta Fed GDPNow model estimate for first-quarter GDP is 3.1%. The New York Fed Nowcast is a more believable 1.59%.

Perhaps you have a month or two before recession starts. Perhaps it has already started.

The NBER will tell you when it started in about a year. Lovely.

Mike "Mish" Shedlock

Comments (86)
Stuki
Stuki

"A widespread myth persists that the stock market is a leading indicator of recessions"

A widespread myth persists that the stockmarket is anything at all; aside from an institution to facilitate Fed redistribution of wealth; from productive people to idle, incompetent dunces; in central bank infected, financialized dystopias.

No. 1-32
abend237-04
abend237-04

Exactly. Stand by for a kitchen sink quarter. Every hairbrained loser project accumulated since Q1, 2009 is about to be discovered to have been fatally damaged by the effects of Covid-19.

A second prediction: The C suite gangs who have driven corporate debt to the hilt buying back overpriced stock to goose their comp plans will have slipped out the back door by the time this one hits bottom...again.

mark0f0
mark0f0

The rail traffic fell dramatically at the rail yard near where I live last spring (2019).
It was pretty obvious then.
I don't see how the US financial sector, insurers, etc., aren't smoking holes in the ground because of this given what's transpired.
The question that needs to be asked is what sort of ratios are we looking at for bail-ins? What happens when under-funded pensions must actually realize cuts to pensioners?

klausmkl
klausmkl

Anything fundamental regarding the market is out. Wait until job losses mount. American mind is to accumulate Toilet Paper. They want to just stuff themselves and then wipe themselves. Nothing else matters. Eating and wiping . Both holes need comfort. The pie hole and the hiney hole, nothing else matters.

Tony Bennett
Tony Bennett

"Bernanke proclaimed in March of 2008 there would not be a recession."

Survey of PROFESSIONAL forecasters February 2008:

The outlook for growth in the first half of 2008 looks much weaker now than it did three months ago, according to 50 forecasters surveyed by the Federal Reserve Bank of Philadelphia. However, the forecasters are not predicting a contraction. Growth in the current quarter is projected at an annual rate of 0.7 percent, down from the projection of 2.2 percent in last year’s fourth-quarter survey. The forecasters are pegging the probability of a downturn this quarter at 47 percent, as discussed in a section below. The forecasters expect growth of 1.3 percent in the second quarter, marking a downward revision from 2.3 percent previously, and they are assigning a probability of 43 percent to negative growth. The forecasters see growth of 2.8 percent in each quarter of the second half of the year.

Tony Bennett
Tony Bennett

"I am confident a recession has started or will start within a month. This shock was that severe."

Tend to agree. What I find interesting is virus impact. Many are proclaiming it won't be that bad, and in 2 months everything back to normal. They might well be right on virus timetable, but the economic damage HAS BEEN done. The fall out will be spread out in the months ahead.

Maximus_Minimus
Maximus_Minimus

The answer to the headline question is, ten years already.
Glad, central banker have a well hidden ammo (they say), which nobody else can see.

TumblingDice
TumblingDice

I see the Dow Jones was up 1985 points today.
Which below is correct?

A. Yesterday's 2000+ drop a Head Fake.

B. Today's bounce short covering.

thimk
thimk

trump hastened his own demise and don't forget trade/tariff wars and government shutdown . but i would still vote for him over Biden . He almost made it over the reelection finish line before recession hits.

ReadyKilowatt
ReadyKilowatt

Last fall when the fed started pumping money into the overnight lending market again is pretty much when the recession started. And because (as Jim Cramer's doppelgänger in an alternative reality might say) "They learned nothing!" meaning business people who had no cash on hand to cover operations, we're all right back to banks running the show. Imagine if you were running a business in 2008 and made sure you had 90 days of cash on hand just in case the credit market seized up. But your competitor who didn't gets to use the helicopter money. And his creditors get a pass even though they should have known better. And that was the end of the responsible business owner. Now it's just credit all the way down.

Greggg
Greggg

In addition to the COVID 19 economic reaction, OPEC's decision to take limits off oil production is finishing off the fracking industry. Their non performing bonds were already coming to roost.

bradw2k
bradw2k

Earlier this week, the head of the Port of Portland was on the radio saying that incoming shipments are down 25% from where they were a year ago. And how many small businesses can survive a couple of months doing 50% of normal business, due to social distancing? I don't think we can even comprehend how much of a global economic slowdown we are looking at here.

tokidoki
tokidoki

End the Fed. It's clear their only purpose is to boost asset prices. That might be fine if the so called asset is somewhat well distributed or perhaps earned through merit. But no.

Uptick
Uptick

Econ textbooks says a recession is defined as 2 consecutive quarters of declining GDP. That's probably a little too narrow a viewpoint. NBER definition a little loser. NBER ANNOUNCED the last recession in Dec of 08, saying it started in Dec 2007. One WHOLE year later.

Market peaked in Oct 10th 2007, not November. GDP was down in q1 2008 but UP by 2.1% q2 2008. S&p was down 18% by that time. Down about 10% by the end of the first quarter.

Looking back is always easy. Mish, I like your articles. This one has too many flaws. There are way too many ways to lie with statistics here. The market was down before the recession started. The NBER got heat for both being late to the announcement, and stating it started Dec 2007, when most economists said later. I’m obviously engaged with the read, which is the point.

I’ll call it now. This is another head fake. Just like in 2011, 2015, and 2018. No recession in the next 18 months.

You all can keep being mad at yourselves for not believing in the value of American progress. But, you’ll eventually be right, for a short time, and I’m sure you’ll let everyone know that you called it.

Sechel
Sechel

stock market predicts 9/5 recessions or some other rediculous stat. personally i don't see the stock market as predicting very much. bond market seems a little more rationale. at least there you see risk of default and the slope of the yield curve does suggest inflation or recession a bit more.

feels like manufacturing has been in recession for some time and it was services that were keeping us afloat, just barely. corona is the straw that breaks the camels back or that black swan event which we know comes every so many years but we never know what in what form.

stillCJ
stillCJ

Editor

Mish, are you against tax cuts now? How un-Libertarian of you! I'll take 'em whenever I can get 'em, which isn't very often.

AWC
AWC

A recession going into the largest money printing event in the history of the planet? We’ll see ‘bout that.

mkestrel
mkestrel

Tesla reaching over $900 per share was the wake up call for me that this down turn was inevitable.

truthseeker
truthseeker

Mish why do you keep forcing me to log on every Friday, every weekend since you know I embrace expensive scotch every weekend? Ok please listen to me you need to embrace your wife even much more than u r doing despite my advice, please let your blog go and focus on her ok?

crazyworld
crazyworld

Every country can play with its own money supply the way it want to. Playing with Money supply is not playing with real wealth of a country. Real wealth is generated each year by economic USEFUL activity be it in industry, manufacturing , services, export. Wealth is not the quantity of money you use in order to barter these useful products as this quantity depend on the value of the money whether the country leave with inflation (or exceptionaly deflation).
We all speak about financial bubbles eventually bursting everywhere They are really generating useful economic activity; a lot of financial and real estate workers and speculators earn their wages trough acting on maintaining them by producing a lot of money supply trough speculative loans.
It is possible to find the US GDP part (and employment figures) related to the financial and real estate services.
But it would be interesting to know the full percentage of the US GDP (trough revenues and revenues increases) directly generated by the always growing bigger bubbles coming back almost every ten years now in the assets This figure known by all politicians explain why in an Election year Trump is so agressive towards the FED printers.

Six000mileyear
Six000mileyear

"More accurately, sentiment changed and that was the trigger."

That is the most difficult concept for market participants to understand because humans live in a physical world where things don't move unless there is a force.

.

ohno
ohno

So if it loses another 20% then what? Everyone piles in, Fed keeps up with their crap, and we blow it back up? I think it needs to dump to the great recession lows for it not to be on shaky ground. Maybe even lower.

Tony Bennett
Tony Bennett

I should mention weather boosted some economic numbers. Typically January and February are lighter months and seasonal adjustments, therefore, play outsized role.

January was 5th warmest on record (126 years) in US. February? THIRD warmest on record.

NOAA:

"The average February temperature across the contiguous U.S. was 36.2 degrees F (2.4 degrees above the 20th-century average), which ranked in the warmest third of the 126-year record.

In fact, the period from December through February was much warmer than normal across the contiguous United States, while precipitation remained above-average, according to NOAA’s National Centers for Environmental Information."

aqualech
aqualech

But it's different this time......

It's being demonstrated that the concept of "moral hazard" is now dead as pertains to manipulation of the markets for the benefit the leveraged speculators and for the benefit of appearances (Trump taking the market performance as a proxy for his popularity). I expect some really reckless acts of interference in markets to make this not your textbook deflating bubble. And my experience is that there is no safe way to play.

BTW - XOM has been but by more than 50% and is now yielding 10%. Is that safe? I'm afraid to touch it. Nor do I have the stomach to "double down" (pun intended) on my losses in miners. Who would want gold with the market going up 10% on Friday?

tokidoki
tokidoki

For most people, recession starts when they get laid off. The stock market is meaningless.

QE2Infinity
QE2Infinity

I've been expecting the recession for some time now. Who knew Fed counterfeiting would be so effective at delaying the day of reckoning.

So here we are: more debt, zombie corporations with problems caused by stock buy backs, and banks with bad subprime loans still on their balance sheet.

Bam_Man
Bam_Man

What's incoming is going to be a lot worse than a recession.

Dogdaze
Dogdaze

Just drove into Denver, Colorado on I-25 this morning at 9am. Traffic was so lightest I've ever seen it. Costco parking lot was jammmed, and curiously the new three story driving range was busy. My tenants (both car guys) were busy with work and customers.

Most of the front range goverments have shut down rec centers, theaters, museums,
Schools, churches are closing, stay home recommendations abound...

Recession... it's coming fast

RonJ
RonJ

In 2001, the stock market didn't predict the end of the recession until 12 months after it did.

tokidoki
tokidoki

Goldman Sachs just said that Q2 GDP will be MINUS 5%.

Catch that falling knife people.


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