Where Have We Been?

Back in February the stock market registered new highs. At the same time, several of the leading indicators we follow were tentatively signaling the emergence of the economy from its third growth slowdown since the financial crisis. Along came the pandemically inspired lockdown and a sharp contraction ensued. Things changed so abruptly, that many normally timely business cycle leading indicators triggered signals well after the horse was out of the barn. The Chemical Activity Barometer (CAB), a unique LEI published by the American Chemical Council (Chart 1), reflects the three slowdowns that have taken place since 2009, and the achievement of a new high in January. The third slowdown, that began in 2018, actually morphed into a recession warning, when the indicator crashed through its 18-month moving average in March. The NBER on June 8 officially confirmed that a recession started in February.

Chemical Activity Barometer and a Price Oscillator (1/24)

Economy moves abruptly into recession.

Source: Martin Pring’s Intermarket Review (click chart to enlarge)

The market and economy will recover. They always do. A large part of the Pring Turner investment approach is derived from the fact that the business cycle and financial markets are nothing more or less than a repetitive chronological sequence of events. Assuming May or June represented the low point, that raises the question; How long will it take it to return to the February high? No one knows of course, but with history as our guide, it’s not likely to happen any time soon. The answer for the stock market is already in so far as the NASDAQ is concerned, as that index recently registered an all-time high. In 1960,1980,1982 and 1990 the stock market touched a new high around the same time their respective recessions ended. Following the first three examples the market, on average, rallied for an addition 7-months without a meaningful correction. In the 1990 case it was almost 3-years.

The Economic Cycle is Bottoming

Chart 2 compares the S&P with our Master Economic Indicator (MEI), an aggregate series constructed from the momentum of several economic sectors. Its main claim to fame is calling the end of recessions and indicating major buying opportunities in the stock market. It does this through a two-step process. First, we get an indication that the economy is totally washed out, as it falls to or below the horizontal green trendline. Of course, it’s easy to spot these points with the benefit of hindsight. A more objective confirmation the second step involves the indicator re-crossing the line again. In doing so, it corroborates a bottoming of both economic momentum and equity prices. One exception, when stocks did not respond to changes in the economic environment developed in 2001; business activity recovered, but the market drifted lower due to the continued unwinding of the tech bubble.

S&P Composite and the Master Economic Indicator (MEI)

Unsustainable rate of decline argues for a quick reversal.

Source: Martin Pring’s Intermarket Review (click chart to enlarge)