Well, sort of. By the time a recession is recognized, it’s bullish. Not so when they’re first starting, but nobody knows when that is until 6 months after the fact. What good is that? Betting on whether there will be a recession or not is a waste of time and brain cells.
We got into an interesting discussion about this yesterday. As I am wont to do because I am usually plagued with doubt, I ended up checking my historical recollection of 55 years of observing markets almost daily, with, what else, a chart. I’ll get to that in a moment. But first, let’s reprise the discussion.
We went back and forth for a while with a game of yes it is, no it isn’t. Turns out we were both right to some extent.
On 6/18/2023 at 10:46 PM, SiP said:
Hard to not bet on recession
On 6/19/2023 at 11:19 AM, DrStool said:Recessions are bullish.
Why? Because that’s when central banks reverse from monetary tightening to monetary easing.
21 hours ago, SiP said:Thats not a correct statement.
After the rates are cut, its true but in most cases recessions are bearish. just think about 2007-2009 or 2000-2002 years
some recessions are shallow, and markets go sideways.
17 hours ago, DrStool said:Based on your chart, by the time the GDP goes negative the market has either bottomed or it’s in the process of bottoming. I would be willing to bet that the first negative GDP print correlates pretty well with a great time to buy stocks. My recollection of the past 55 years watching the market tends to square with that.
17 hours ago, SiP said:“GDP goes negative the market”
So you depend on the news that is published. I rather talk about recessions period which are marked on the charts as recessions. Regarding last big recession (great Recession – began in December 2007 and ended in June 2009). I think we got the news much earlier than in beg. of 2009 that we are in the recession. Market found a bottom in march 2009. I think we got the first news about recession in mid 2008 (two conseq. negative GDP print) at least you would sold stocks by fall 2008 which was brutal.Of course you could sold stock much earlier based on many LEI, PMI, new orders etc. or even first economic negative print.
But you are also correct – that when you officially get the news, market is at least (probably) half way there
11 hours ago, DrStool said:No I’m not talking about the news. I’m talking about when the GDP goes negative. Look at your chart. When the GDP line drops into negative territory the market bottoms.
11 hours ago, SiP said:you are right. Many times in the epicenter of recession stocks find bottom. But in the epicenter, not at the beginning. We didnt even start the recession. H2 should be ugly.
Finally,
I did a little chart research to check zooming in to the last 30 years to see the correlation more closely.
A recession is defined as two consecutive quarters of negative growth. It appears that the first negative reading is still bearish for stocks. By the time of the second reading and the official recognition that yes Virginia, we’re in a recession, that’s pretty close to the bottom.
For example, the first negative GDP reading in the Great Financial Crisis was Q3 2008. The second was in Q4, which would have been reported in late January 2009. Stocks bottomed in March. A buy and hold investor who bought on the first announcement would have made a killing. The Fed instituted direct purchases of Treasuries and MBS from Primary Dealers, i.e. QE, in March. That’s what turned the market.
Conversely, the second negative reading in the pandemic panic was in Q2 2020. By the time that would have first been reported in late July, it would have been way too late. The Fed had already started massive QE in March.
Recession is a second order issue which correlates with stock prices but doesn’t drive them. The issue is the quantity of money and how fast Qm is growing. The Fed stays tight until the economy weakens. When the recession is recognized the Fed reverses policy. Markets are generally bearish when the Fed is tight, and they turn bullish when the Fed eases. Normally the easing is aggressive when the recession is recognized. That’s why stocks typically rocket off the lows when the Fed reverses course.
As for the statement “Markets are generally bearish when the Fed is tight,” I don’t think that the current market is an exception. If I’m right, we’ll see the evidence later this year or in 2024. But secular bear markets can have huge cyclical bullish swings. 1968-82 is considered a secular bear period, but there were multiple bull and bear cycles that repeatedly tested highs and lows. I expect the current era to look something like that. The Fed’s Slush Fund is Working
For moron the markets, see:
- We Have Met the Resistance June 20, 2023
- Gold Gets Nearer Important Cycle Lows June 18, 2023
- The Fed’s Slush Fund is Working June 16, 2023
- Swing Trade Chart Picks – Adding Late Cycle Buys June 16, 2023
- Rally Broadens as It Gains Momo June 12, 2023
- Gold Set Up for This Cycle Low June 7, 2023
- Investors Breathe Sigh of Relief But D-Day Is Now June 6, 2023
- Incomprehensible, That’s What You Are June 2, 2023
- Modestly Hedged Dealers, Record Short Hedge Funds Suggest Disaster Ahead May 25, 2023
- The Most Widely Forecast Economic Disaster In History May 16, 2023
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