Even though there has been no recession for 10 years, students of the business cycle know that it is still alive and well. Instead of a full-blown contraction in business activity, the last decade has seen the US economy experience two mid-cycle growth slowdowns and subsequent recoveries. A third slowdown has been underway for the last year, begging the question of whether it will morph into a recession or transition into a fourth growth phase of this extended economic expansion. We raised this question in January in an article entitled “A Slowdown is in the Bag, but What About a Recession?” Since then, several forward-looking indicators have extended their corrective phase and edged closer to recessionary territory. Many financial market observers have been quick to jump on the recession bandwagon, but we did not see compelling evidence to make that call for the client portfolios we manage at Pring Turner. In fact, many reliable indicators have started to perk up from levels that have traditionally warded off contractions in business activity. So far, this selective firming is somewhat tentative. If renewed economic growth is for real, we would expect to see the equity market discount the good news and continue to rally. In order to get a better grasp on things, let’s first take a quick look at the economy by putting the visible green shoots in perspective. Subsequently we will examine the equity market’s long-term technical position to see whether there is a solid case for another up leg in the 2009-20?? bull market.
Latest Data Argue for an Economic Bounce
Chart 1 characterizes the recent growth slowdown and tentative recovery. It features the Chemical Activity Barometer (CAB), a leading economic indicator published by the American Chemistry Council. We like it because this indicator has peaked ahead of every recession (highlighted in red) since the 1920’s. Moreover, it is usually relatively deliberative in its trajectory, i.e. not subject to numerous false signals. The lower panel displays a price oscillator constructed by dividing a 3- by an 18-month moving average (MA). Negative zero crossovers, occur fairly consistently close to the onset of a recession. These instances have been flagged by the red vertical lines. The two post 2009 and current slowdowns have been identified by the dashed blue arrows, and the subsequent recovery period by the solid ones.
Chart 1 The Chemical Activity Barometer and a Momentum Indicator 1968-2019
Sources: American Chemistry Council, Pring Research
The momentum of Chemical Activity Barometer has bounced from the “recession” line…Perhaps Signaling Another Extension to This Rather Long Business Cycle Expansion.
The green arrows in Chart 2 have been inserted at points when the oscillator looked as if it was about to signal a business cycle contraction but rallied instead. These turnarounds signaled that the slowdown had ended, a recession averted and that a stock market rally was in a relatively early stage.
Chart 2 S&P Composite vs Chemical Activity Barometer Momentum 1992-2019
Sources: American Chemistry Council, Pring Research, Reuters
Upside reversals in the CAB oscillator from around zero represent great buying opportunities for stock investors.