January 3, 2012
While it is interesting to observe in the above chart that only two of the nine components are currently flagging recession, it is also prudent to observe the probability state of those systems not yet flagging recession as shown below. These are maximum-likelihood single-factor logit statistical models built from the unmodified underlying time-series, and configured with “golden triggers” that are thresholds above which the respective probabilities must rise or fall to initiate a recession call/end for the series being studied. These triggers are optimized to give the individual probability model the best-fit to historical NBER dates from a false positive, area under curve fit, lead/lag etc. perspective. As you can see, all the other systems are way below their respective recession call triggers.
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From an actionable point of view, investors should focus on the “long leading” five-month SuperIndex. This recession signal has presaged an average 28% drop in the US stock markets in six of seven occasions. The two-month, co-incident and diffusion indexes are more useful when it comes to confirming real-time presence of a recession or not. They are also our “safety nets” should the long-leading SuperIndex prove suboptimal in recession lead-dating. The long-term history of the five-month SuperIndex (providing on average a five-month lead to NBER recession) is displayed below. We are certainly “vulnerable” to recession at current levels but it is by no means a “done deal” on the four to six month horizon.
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Dwaine van Vuuren is CEO of PowerStocks Investment Research, a South African-based provider of investment research. If you would like to receive the next 4 weeks SuperIndex Recession Reports for free, just email us at with FREE SUPERINDEX in the subject line.
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