Do Asset Price Drops Foreshadow Recessions?
John C. Bluedorn (IMF), et al. | Oct 2013
This study explores the predictive power of asset prices in forecasting recessions across G-7 countries. The results indicate that declines in asset prices are significantly linked to the onset of recessions in these nations. Notably, the impact of drops in equity or housing prices on new recession probabilities can be quite considerable. Equity price declines tend to be more pronounced and frequent compared to housing price declines, making them generally more effective as recession indicators. These conclusions remain robust even when accounting for variables such as the term spread, uncertainty, and oil prices. Furthermore, the analysis reveals no significant bias attributable to the infrequency of recession onset.
November’s performance metrics reveal a stark contrast to the gains seen during the easy money periods of September and October. The notable exception is the US stock market, which rose by 2.9% in November on a total return basis. Conversely, the major asset class that suffered the most was US REITs, which experienced a substantial decline of 5.2% during the past month.
The ISM Manufacturing Index is projected to show a slight decrease to 56.2 in its November report (scheduled for release on Dec. 2), as per The Capital Spectator’s average econometric prediction. This figure compares to the previously recorded 56.4 for October. Additionally, the forecast from The Capital Spectator is somewhat higher than the consensus estimates provided by economists for November.
The Capital Spectator will take a brief hiatus for a few days to celebrate the holiday season, followed by a period of relaxation. Regular analysis on macroeconomic and financial topics will resume on Monday, December 2. In the meantime, it’s time to prepare festive meals and reflect on our blessings. Wishing everyone a wonderful holiday!
Recent updates on initial jobless claims and the Chicago Fed National Activity Index provide positive indications for the US economy as it nears the Thanksgiving holiday. Jobless claims dropped once again last week, reaching the lowest point since late September. Meanwhile, the three-month moving average of the Chicago Fed National Activity Index (CFNAI-MA3) rose in October, marking the highest level seen in eight months. Together, these reports contribute a more optimistic outlook for the US economy. While it might be premature to assert that growth is set to accelerate, today’s data suggests that pessimism in macroeconomic forecasts is becoming increasingly difficult to justify.
A recent, surprisingly strong report on newly issued housing permits offers compelling evidence that the residential real estate market is likely to continue its growth in the short term. The combined releases of September and October permit data surpassed expectations by a significant margin. October’s figures were particularly impressive, with permits soaring to a five-year high. The accompanying hard data on housing starts has been delayed until December 16. Nevertheless, since permits and starts typically show parallel trends over time, the encouraging news suggests that the upcoming data for November will likely tell a positive story.
The three-month moving average of the Chicago Fed National Activity Index (CFNAI) is anticipated to show a slight rise to 0.04 in the upcoming October update (scheduled for release on November 27), based on The Capital Spectator’s average econometric projection. The previous September estimate was recorded at -0.03. Values below -0.70 indicate an “increasing likelihood” of a recession as per guidelines from the Chicago Fed. Based on today’s figures, CFNAI’s three-month average is expected to remain at historically favorable levels, consistent with economic expansion and indicating a trend slightly above average.
The last five years have been anything but ordinary for financial markets, largely due to the distinctive macroeconomic conditions prevalent globally. The combination of escalating uncertainty regarding economic growth and unprecedented monetary policies has created a landscape markedly different from that seen at the edge of the 2008 crisis. Five years later, having navigated through potential disaster, it’s pertinent to ask: Have our experiences during this time aided or obstructed our capacity to manage and design diversified investment portfolios?
The US economy has faced several challenges in recent months, including a government shutdown, rising interest rates, and a weakening consumer sentiment. While one might interpret these events as ominous signs for the business cycle, the current evidence does not support such conclusions. Overall macro risk appears low, as indicated by 14 economic and financial indicators. The Economic Trend Index (ETI) and Momentum Index (EMI) both remain well above levels that historically signal danger, suggesting that the chances of a newly emerging recession were low through October.
● Fortune Tellers: The Story of America’s First Economic Forecasters
By Walter A. Friedman
Summary via publisher, Princeton University Press
The period leading up to the Great Depression saw the emergence of economic forecasters, individuals who sought to employ scientific methods to predict future trends for profit. This book narrates the lives and careers of these pioneering figures, such as Roger Babson, Irving Fisher, John Moody, C. J. Bullock, and Warren Persons. They competed to offer their unique predictive techniques to investors and businesses, thriving during the post-World War I boom. Yet, almost all failed to anticipate the catastrophic crash of 1929.
