Is The U.S. Heading For A Recession?
The closely-watched smoothed growth rate of the ECRI Weekly Leading Index (WLI) is about to peak, indicating that the WLI is losing momentum. In previous articles I argued that the S&P 500 Index is the most important constituent of the ECRI WLI as evidenced in the graph below where my calculated smoothed growth rate of the S&P 500 is depicted against that of the ECRI WLI.
Sources: Dismal Scientist; I-Net Bridge; Plexus Asset Management.
Closer examination indicates that the S&P 500's smoothed annualised growth rate is rolling over.
Sources: Dismal Scientist; I-Net Bridge; Plexus Asset Management.
The yield on the U.S. 10-year government bond note is also a major constituent of the WLI. My calculated smoothed growth rate of the yield is depicted against that of the ECRI WLI.
Sources: Dismal Scientist; I-Net Bridge; Plexus Asset Management.
Closer examination also points to a roll-over of the smoothed annualised growth rate of the yield on the U.S. 10-year government bond note.
Sources: Dismal Scientist; I-Net Bridge; Plexus Asset Management.
Materials are a known constituent of the ECRI WLI. As a proxy for materials I used the smoothed annualised growth rate of the Economist Metals Index.
Sources: Dismal Scientist; I-Net Bridge; Plexus Asset Management.
The roll-over of the smoothed annualised growth rate echoes that of the S&P 500 Index and that of the yield on the 10-year bond note.
Sources: Dismal Scientist; I-Net Bridge; Plexus Asset Management.
To ascertain whether the recent pull-back in the S&P was not the reason behind the roll-over of the smoothed annualised growth rate, I looked at different scenarios to calculate the future smoothed annualised growth rate. The current level of the S&P 500 was assumed to be 1280 and I kept it constant at:
- 5% lower
- Unchanged
- 5% higher
- 10% higher
Sources: Dismal Scientist; I-Net Bridge; Plexus Asset Management.
It is interesting to note that the smoothed annualised growth rates have peaked in all cases except where the S&P 500 was assumed to be 10% higher. In the case of the latter, the growth rate is about to peak at the end of April this year. Another important observation is that in the case of the S&P 500 being 10% lower from the current levels, the Index's smoothed annualised growth rate will turn negative as early as the end of April this year! If the smoothed annualised growth rate of the ECRI WLI follows suit, it may indicate that the U.S. will find itself in a recession early next year given the historical average lead of 10 months at business cycle peaks.
With the two big black swans in the global pond - the MENA uprising and the great Tohoku earthquake - did the upward leg of the current business cycle come to an abrupt end? I have no doubt that the markets will lead the way answering that question.
Tweet
Author: Prieur du Plessis
Dr Prieur du Plessis
investmentpostcards.com
With 25 years' experience in investment research and portfolio management, Dr Prieur du Plessis is one of the most experienced and well-known investment professionals in South Africa. More than 1 000 of his articles on investment-related topics have been published in various regular newspaper, journal and Internet columns. He also published a book, Financial Basics: Investment, in 2002.
He holds the following degrees: BSc (Quantity Surveying) (Cape Town), HonsB (B & A) (cum laude) (Stellenbosch), MBA (cum laude) (Stellenbosch); and DBA (Doctor of Financial Management) (Stellenbosch).
Prieur is chairman of the Plexus group of companies, which he founded in 1995. Previously he was general manager: portfolio management at Sanlam, responsible for the management of investment portfolios with total assets in excess of $5 billion.
Plexus is a pioneer in the mutual fund industry and has achieved a number of firsts under Prieur's leadership. These include the authoritative Plexus Survey, a quarterly analysis of the consistency of the performance of unit trust management companies, the Plexus Offshore Survey, the Plexus Unit Trust Indices, and the PlexCrown Fund Ratings.
Plexus is the South African partner of John Mauldin, American author of the most widely distributed investment newsletter in the world, and also has an exclusive licensing agreement with California-based Research Affiliates for managing and distributing its enhanced Fundamental Index™ methodology in the Pan-African area.
In 2001 Prieur received the Santam/AHI Business Leader of the Year award for corporate leadership, business acumen and entrepreneurial flair. He was also profiled in the book South Africa's Leading Managers (2006). Plexus received the AHI/Old Mutual Enterprise of the Year award in 1997 and was also included in the book South Africa's Most Promising Companies (2005).
Prieur is 52 years old and lives with his wife, TV producer and presenter Isabel Verwey, and two children in Welgemoed, Cape Town. His recreational activities include long-distance running, motor cycling and reading. He belongs to the Cape Town Club, Johannesburg Country Club, Gordon's Bay Yacht Club and Swiss Social & Sports Club.
Copyright © 2008-2012 Dr Prieur du Plessis
Circle Us