Recession Buy Indicator Says: It's a Recession So Buy Stocks

That's contrarian, of course.  Barry Ritholtz over at The Big Picture has a good explanation.  Here's the nutshell: the "Recession Buy Indicator" looks at the four indicators in the Index of Coincident Indicators, and signals when each of these has declined over the past six months.  That's a rough measure of whether the economy is in recession, and the signal says buy stocks.

Right now the signal says BUY.

Why would it do that?  The stock market tends to be a leading indicator of the economy.  By the time it's obvious that we are a recession, we're stocks are already down.  Once everyone realizes we are in recession, the market is ready to look forward to the recovery.  As Ritholtz notes, there are some exceptions that would clobber an investor who mindlessly followed the rule.  Nonetheless, it's another bull signal.

Comments

[Laurence Hunt]

Bill,

I'll admit that I'm wary of this particular buy signal, though it may still prove to be as good as the rest.

Bill Fleckenstein commented recently that many smart investment professionals who sat out the 1929 crash got sucked back in, in 1930. They knew the game - too well for their own good, as it turned out.

If the structural problems with money supply and finance (think debt at all levels, much of it unpayable or unrecoverable) are as bad as the data indicate, then the usual signals may not apply at this juncture.

I know a lot of smart investors are viewing this as a buying opportunity, but if this is a secular bear market, there could be a much harder pullback before this is over.

That is, so far the market action looks awfully tame for a bottom. And there is lots of background noise that doesn't mesh, like the big banks squeezing their loan managers hard, etc.

If there's an upside, it is probably the cheapness of US exports in terms of purchasing power parity. The question is if the US still has enough to export, with the current account still running -$700 billion per year, and if there is enough global demand (and freedom from barriers) to fuel the purchasing.

And of course, the US is still far from cheap when contrasted to China, which dominates in 7 years in purchasing power terms, occurring to Angus Maddison (see my current brief blog post on that topic)

That is, maybe this time it's different. Lots of reasons to believe it could be, though of course "normal" could quite possibly go on for more cycles than I can imagine.