Stock Market is Not Forward Looking
A widespread myth persists that the stock market is a leading indicator of recessions, providing a year or more warning on average before one starts.
Actually, the stock market is a coincident indicator of sentiment towards stocks, no more no less.
The stock market sees ahead myth stems from Wall Street pimps who want you in the market 100% of the time or they don’t make money.
2007 Recession Trigger
The stock market peaked in November of 2007. Recession started in December of 2007.
What was the 2007 recession trigger?
There was none, at least one that people can easily point to. More accurately, sentiment changed and that was the trigger. The pool of greater fools willing to buy houses ran out.
Conditions rapidly changed from people standing in lines wrapped around the corner to enter a lottery to buy a condo, to no one in line at all.
The change happened in a week in Florida then rapidly spread through the country with agents touting “this market is different” until the entire country was engulfed.
2020 Trigger
People are already blaming the coronavirus.
Yes, it was a trigger. No, it is not to blame.
This recession was baked in the cake long ago, running solely on fumes of Fed stimulus then Trump tax cuts.
Price vs Earnings Estimates
Image from FactSet, anecdotes mine.
Anatomy of a Bubble
That’s the anatomy of a bubble and the coronavirus had nothing to do with it.
Moreover, earnings estimates are horrendous at the top. So despite the decline, stock are still not cheap.
It will take another 20% decline from here before we can begin discussing cheap.
Guess what?
Bubbles burst. The coronavirus no doubt accelerated the decline and kicked off a recession, but Fed-sponsored bubbles sew the seeds of their own decline. That is the true cause.
Recession Has Begun
I am confident a recession has started or will start within a month. This shock was that severe.
Cruise ships cancelled, NBA and NHL cancelled. The local businesses and bars around those hotshots will suffer.
There are supply chain disruptions everywhere.
The stock market decline will put a dent into boomers buying cars, taking vacations etc.
The demographics are poor. Downsizing and retired boomers wanting to sell their homes will not find millennial buyers.
Trump was good for the market. It hasn’t priced in Trump losing, and a recession coupled with his poor handling of the coronavirus will do it, no matter how quickly the coronavirus pandemic cools. Lost wages and profits are gone forever.
Denial
There was strong denial in 2007 regarding a recession.
Bernanke proclaimed in March of 2008 there would not be a recession. It had already started 3 months prior. He also told Congress there was no housing bubble to bust.
Is the same happening now? I think so. The Atlanta Fed GDPNow model estimate for first-quarter GDP is 3.1%. The New York Fed Nowcast is a more believable 1.59%.
Perhaps you have a month or two before recession starts. Perhaps it has already started.
The NBER will tell you when it started in about a year. Lovely.
Mike “Mish” Shedlock
Goldman Sachs just said that Q2 GDP will be MINUS 5%.
Catch that falling knife people.
In 2001, the stock market didn’t predict the end of the recession until 12 months after it did.
Just drove into Denver, Colorado on I-25 this morning at 9am. Traffic was so lightest I’ve ever seen it. Costco parking lot was jammmed, and curiously the new three story driving range was busy. My tenants (both car guys) were busy with work and customers.
Most of the front range goverments have shut down rec centers, theaters, museums,
Schools, churches are closing, stay home recommendations abound…
Recession… it’s coming fast
What’s incoming is going to be a lot worse than a recession.
I’ve been expecting the recession for some time now. Who knew Fed counterfeiting would be so effective at delaying the day of reckoning.
So here we are: more debt, zombie corporations with problems caused by stock buy backs, and banks with bad subprime loans still on their balance sheet.
For most people, recession starts when they get laid off. The stock market is meaningless.
But it’s different this time……
It’s being demonstrated that the concept of “moral hazard” is now dead as pertains to manipulation of the markets for the benefit the leveraged speculators and for the benefit of appearances (Trump taking the market performance as a proxy for his popularity). I expect some really reckless acts of interference in markets to make this not your textbook deflating bubble. And my experience is that there is no safe way to play.
BTW – XOM has been but by more than 50% and is now yielding 10%. Is that safe? I’m afraid to touch it. Nor do I have the stomach to “double down” (pun intended) on my losses in miners. Who would want gold with the market going up 10% on Friday?
XOM, RDS.B, the oil ETFs, all buys. Don’t believe the solar hype; there’s no place to store solar energy at night when it’s needed now (if battery tech changes, then solar power and solar powered cars are buys, but not now). By the year 2050, the USA, since nuclear power is dead (sadly, since next-gen nuclear is pretty safe, once you figure out where to store the byproducts) will largely get most of its power the same place it gets it now: fossil fuels, with natural gas displacing coal at best.
Yeah, but the point is, why won’t it fall another 25% in short order? Like miners, these big oil stocks are literally being hauled out and executed. I suppose a PE of 8 or less might be a safe target for buying.
true. That’s always a problem in a falling market…nobody wants to catch a falling knife but wants to catch it at the exact bottom or on the rebound, but hard to do.
I should mention weather boosted some economic numbers. Typically January and February are lighter months and seasonal adjustments, therefore, play outsized role.
January was 5th warmest on record (126 years) in US. February? THIRD warmest on record.
NOAA:
“The average February temperature across the contiguous U.S. was 36.2 degrees F (2.4 degrees above the 20th-century average), which ranked in the warmest third of the 126-year record.
In fact, the period from December through February was much warmer than normal across the contiguous United States, while precipitation remained above-average, according to NOAA’s National Centers for Environmental Information.”
I see my boo boo – “warmest third” is not third warmest.
My apologies.
Don’t apologize. Here in Greece, the winter was warm. Hardly any snow in the mountains, a complete joke. Insects coming out of hibernation before their time and early flowering of plants. Global warming is real.
So if it loses another 20% then what? Everyone piles in, Fed keeps up with their crap, and we blow it back up? I think it needs to dump to the great recession lows for it not to be on shaky ground. Maybe even lower.
Probably true, but Australia has not had a recession in something like 25 years. In a mature economy like the USA, arguably there’s little need for a recession due to lack of malinvestment (or any investment!). What’s really interesting, and by private emails I’ve discussed this for the last couple of years with famous economists, is if the USA does not experience a recession (two consecutive negative quarters of growth) despite all the pessimism and, recently, despite Covid19.
A “mature” economy, meaning a wealthy one, is one with lots of existing capital. In such an economy, most investment is necessary just to make up for depreciation of the huge capital stock.
So while lack of investment means lack of overt malinvestment of the bridge-to-literal-nowhere kind, it also means a slow decay back down to poverty, as capital previously built up depreciates.
With effects pretty obvious to anyone observing the US over the past 50 years, since Nixon ended the last vestige of ability to differentiate mal-, from non-mal-, investment.
The test is NOT accurate
From that article, the CDC test sometimes gives false positives. By contrast, the Chinese test supposedly gave a fairly high number of false negatives. Which would you prefer?
“More accurately, sentiment changed and that was the trigger.”
That is the most difficult concept for market participants to understand because humans live in a physical world where things don’t move unless there is a force.
.
Every country can play with its own money supply the way it want to. Playing with Money supply is not playing with real wealth of a country. Real wealth is generated each year by economic USEFUL activity be it in industry, manufacturing , services, export. Wealth is not the quantity of money you use in order to barter these useful products as this quantity depend on the value of the money whether the country leave with inflation (or exceptionaly deflation).
We all speak about financial bubbles eventually bursting everywhere They are really generating useful economic activity; a lot of financial and real estate workers and speculators earn their wages trough acting on maintaining them by producing a lot of money supply trough speculative loans.
It is possible to find the US GDP part (and employment figures) related to the financial and real estate services.
But it would be interesting to know the full percentage of the US GDP (trough revenues and revenues increases) directly generated by the always growing bigger bubbles coming back almost every ten years now in the assets This figure known by all politicians explain why in an Election year Trump is so agressive towards the FED printers.
” For anything longer, the Fed is irrelevant.”
Absent a Fed, there would barely exist a “financial industry.” (industry my rear…. The Mafia is more productive and industrious…)
People would keep Gold in vaults. Not hand it to some useless dunce claiming to “beat” debasement driven inflation.
The mere exist since of a Fed, any Fed, is what has enabled the rot. Their existence is why certifiable idiots comprise almost the entire wealthy, and hence ruling, classes of the US, while productive, minimally competent people are stuck having to listen to those morons. It’s why all resources are being allocated by genuine illiterates.
The Fed is why the Federeal Government have been able to fund pointless wars. It’s why “entitlements”, and “mandatory spending” hasn’t blown up years ago, back when the fallout would be smaller.
It’s why morons have “made money off their house”, while productive people are either homeless, or stuck in indentured servitude to idle, useless nothings; simply to afford a roof over their heads.
Etc., etc…
Take the Fed away, and you have very little of the financialization which have by now conclusively proven to be an almost infinitely worse a fate, than Chinese style straight up communism. People would work, put gold in a vault when they have a surplus, live off gold when they can afford to retire. No productive person would have his earnings debased, in order to keep an army of overpaid abject nothings in splendor while deciding how scarce capital created by others, should be allocated.
No “hedge fund managers”, “money managers” and other completely useless, negative value add, leeches to act as boat anchors around the ankles of productive Americans. And absent “asset values” being the sole determinant of people’s livelihoods, there would be much, much less for the ambulance chasing dregs of society to latch onto as well.
You’d either produce value, or you’d have none. The consequences of the latter, being that you’d pretty quickly find a way to produce some. Or, otherwise, you’d at least have no option but to end stop consuming anything.
China hints at denying Americans life-saving coronavirus drugs FAKE/REAL NEWS??
Tesla reaching over $900 per share was the wake up call for me that this down turn was inevitable.
Why did TSLA go down today of all days?
Its about $543 overvalued per share. That’s why.
Exactly
It’s worth at least $50! Okay, $10?
must be them fckn algos…..Who, with half a braincell left, would push a shit company like that towards 1000$ ?
Tesla? It’s only today back to where it was in January of this year. Compare to XOM, which is back to where it was in 2003. XOM btw is a buy.
Mish, are you against tax cuts now? How un-Libertarian of you! I’ll take ’em whenever I can get ’em, which isn’t very often.
I’m hoping for a deflationary cycle…fixed income and all. Assuming my pension doesn’t go broke.
I would have been for a middle class tax cut. That was anything but.
I also believe in small govt.
Trump has disappointed on so many grounds
I guess we lucked out. Tax cut saved us $600 a month in taxes. I agree it should have been better for lower incomes and structured differently. Our AGI was around $170K (two paychecks) in 2019 but live near Seattle so not living high (or flying high as Ozzy says).
The cut dropped marginal rates pretty much across the board (10% excluded) and nearly doubled the standard deduction. Most of the lower-income earners cannot itemize so this was a big plus for the majority of them.
While rates also dropped for the high-end earners the limit on SALT deductions likely eliminated much, if not all, of the benefit, especially in high tax states such as NJ, NY, CN and CA, where many higher-earners live and can itemize. They (and their state’s taxing authorities) got hit by this. That’s why several of the states fought the changes. They lost. I know they are trying to come up with schemes to get around it but I haven’t kept up with it and how the IRS is ruling on it.
The states’ complaint is that it has an unfair impact on their residents. In their minds, it is apparently “fair” to have lower-tax states subsidize their populace via federal taxes.
The House Democrats voted to raise the cap to $20,000 for this tax year for incomes under $100 million ($10,000 cap remains for $100 million and up) and temporarily eliminate it for 2020 and 2021. The vote was primarily along party lines as only 5 Republicans voted for it. It has to go through the Senate where Republicans will probably defeat it but the Dems attempting to give a tax break back to higher-earners is amusing.
I suspect the tax changes did not benefit the high-income groups in terms of effective tax rates and percentages of taxes paid. But until the IRS tax stats come out for the 2018 tax year and comparisons can be made against the 2017 data a suspicion is all it is for the time being.
A study once found that the most optimal tax was one that hit the middle class hard, and did not touch the lower classes nor the upper classes. The theory is the people taxed hardest would do their darnedest to either get rich or go broke trying…
I am in favor of higher taxes only because neither the Republican “borrow-and-spend” nor the Democratic party “tax and spend” deficit spending is good long term (I don’t believe in Ricardian equivalence ‘we owe it to ourselves’), and I don’t believe in the William A. Niskanen strategy of ‘Starve The Beast’ (neither did Niskanen later in his life).
Having said that, as a trust baby I’m firmly against lowering the inheritance tax threshold of about $10M (and anyway death taxes don’t raise that much money).
Econ textbooks says a recession is defined as 2 consecutive quarters of declining GDP. That’s probably a little too narrow a viewpoint. NBER definition a little loser. NBER ANNOUNCED the last recession in Dec of 08, saying it started in Dec 2007. One WHOLE year later.
Market peaked in Oct 10th 2007, not November. GDP was down in q1 2008 but UP by 2.1% q2 2008. S&p was down 18% by that time. Down about 10% by the end of the first quarter.
Looking back is always easy. Mish, I like your articles. This one has too many flaws. There are way too many ways to lie with statistics here. The market was down before the recession started. The NBER got heat for both being late to the announcement, and stating it started Dec 2007, when most economists said later. I’m obviously engaged with the read, which is the point.
I’ll call it now. This is another head fake. Just like in 2011, 2015, and 2018. No recession in the next 18 months.
You all can keep being mad at yourselves for not believing in the value of American progress. But, you’ll eventually be right, for a short time, and I’m sure you’ll let everyone know that you called it.
Tik Tok is the only American company I’ve see progressing in the last two years.
Lol. What a clown
There’s so much unproductive ‘crap’ that is counted in “GDP” that the NBER’s strict definition is practically useless.
Depends on your definition of “market”. As a trader, I look at many markets. I just checked my chart of the Nasdaq 100 and it topped 10/31/07. Close enough to November that I won’t berate Mish. I do not know which market he was looking at or recall which market rolled over last. I was trading then and liquidated all stock positions in November 2007 so I do recall the period.
I actually liquidated all long stocks in my account (but only cut some loose in my wife’s) last fall. I was premature moving into Treasuries but hey, we have only lost a little in this crash.
Cut Mish some slack is all I am saying.
Yours is a remarkable forecast. We shall see. All I can tell you for sure is that we have no known cases in my town, and only one in the state, yet the economic activity (except TP sales) is substantially down. There are less cars driving, less people going to work. The mailman tells me that every business he goes to tells them they have seen the impact. With this repeated across the country, I can’t see how we can avoid at least a recession, but time will tell.
“Econ textbooks says a recession is defined as 2 consecutive quarters of declining GDP. That’s probably a little too narrow a viewpoint. NBER definition a little loser. NBER ANNOUNCED the last recession in Dec of 08, saying it started in Dec 2007. One WHOLE year later.”
…
A few things.
“The NBER does not define a recession in terms of two consecutive quarters of decline in real GDP. Rather, a recession is a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales.”
“One WHOLE year later.”
Q1 2008
BEA making the initial GDP call with subsequent revisions.
April 30, 2008 … +0.6%
May 29, 2008 … +0.9%
June 26, 2008 … +1.0%
July 31, 2008 … +0.9%
August 28, 2008 … +0.9%
Most current revision?
July 27, 2018 … -2.3%
End the Fed. It’s clear their only purpose is to boost asset prices. That might be fine if the so called asset is somewhat well distributed or perhaps earned through merit. But no.
The fed’s other purpose is to support bad banks and bad lending practices at the expense of more financially prudent people.
Absolutely. When I was a child and still believed in fairies, the Fed just seemed like some magical institution, but now, it’s hard to name even ONE reason why the Fed should exist. And I am generally not an extreme person. All that talk about replicating the old JP Morgan just sounds hollow nowadays. The man was saving his own ass, not some saint.
Earlier this week, the head of the Port of Portland was on the radio saying that incoming shipments are down 25% from where they were a year ago. And how many small businesses can survive a couple of months doing 50% of normal business, due to social distancing? I don’t think we can even comprehend how much of a global economic slowdown we are looking at here.
In addition to the COVID 19 economic reaction, OPEC’s decision to take limits off oil production is finishing off the fracking industry. Their non performing bonds were already coming to roost.
Good point, but I have a question. So, let’s say Saudi’s get what they want and wipe out every fracker…the price goes back to 80…doesn’t the company who bought a lot of the mothballed fracking equipment at fire-sale prices, re-start operations, at a lower cost? Doesn’t that cap oil at $70 pretty much in perpetuity?
I think so and it will take a while depending how long average fracker is hedged for. Some hedged at about $55.
After bust, assets picked-up at a fraction of the price and without much interest cost will bring down future costs too.
I agree. There’s money in that black gold, if the price is right. The Saudis (and Putin) have not done in shale oil, only stopped it temporarily (if at all). Just a change in ownership.
Most fracking equipment and know-how is commoditized now.
The Russians and Saudis can “take each other out” somewhat more long term, since their megaprojects have high startup and shutdown costs.
But a shale well, doubly so an already producing ones, can darned near be restarted by some dude throwing stuff he has in his garage into the back of his halfton, and driving over to fire it back up, in order to make beer money for Friday night. Kick back in a lawnchair clutching a shotgun and reading a book, or pornmag, under the light from the gas flare, while lifting another barrel out of the ground. Sell the barrel to some dude with a bigger truck, who’ll take it down to the nearest refinery….
It’s a level of flexibility and granularity, the Saudis and Russkies can’t even hope to keep out long term. Heck, the greater the success at driving creditors out of the game, the lower the costs, and the more resilient the “Uber drivers of the oil industry” are likely to get.
“Kick back in a lawnchair clutching a shotgun and reading a book, or pornmag, under the light from the gas flare, while lifting another barrel out of the ground.”
…
Matthew McConaughey??
The Saudis are only along for the ride. This time Putin decided since it can afford to drop its energy prices for purposes of collapsing the US fracking debt. This is in retaliation for The Us’s war against the building of the Nord Stream II pipeline, the interference in the Ukraine since 2014 and a whole bunch of other reasons. As far as the Saudis are concerned: They are caught in the middle. They say they are going to increase crude production to 12-13 million barrels and they have no capacity to go any where close to that figure. MBS is in panic mode and has swept competition against his thrown and who knows where those royals have been detained or ?. The Saudis need $80/barrel to keep the kingdom and the Yemen war going and there is now a big threat that the peasants are going to revolt.
Last fall when the fed started pumping money into the overnight lending market again is pretty much when the recession started. And because (as Jim Cramer’s doppelgänger in an alternative reality might say) “They learned nothing!” meaning business people who had no cash on hand to cover operations, we’re all right back to banks running the show. Imagine if you were running a business in 2008 and made sure you had 90 days of cash on hand just in case the credit market seized up. But your competitor who didn’t gets to use the helicopter money. And his creditors get a pass even though they should have known better. And that was the end of the responsible business owner. Now it’s just credit all the way down.
I see the Dow Jones was up 1985 points today.
Which below is correct?
A. Yesterday’s 2000+ drop a Head Fake.
B. Today’s bounce short covering.
BOTH!
This is the new normal — How Exciting!
(Hopefully that’s not the case, but WTH.)
I vote for short covering. Seen big upswings in the final hour the last 3 weeks. I think that traders don’t want to be short over the weekend.
(But what the hell do I know…)
These gyrations reveal one thing for certain – too much leverage in the system.
No way these moves occur without. TPTB love the levered moves upward, not so much the other way.
If stocks crater, you can count on them trying to limit leverage. And once things are in the clear (bottomed), any rules put in place re leverage will be softened (at Wall Street’s insistence).
The answer to the headline question is, ten years already.
Glad, central banker have a well hidden ammo (they say), which nobody else can see.
“I am confident a recession has started or will start within a month. This shock was that severe.”
…
Tend to agree. What I find interesting is virus impact. Many are proclaiming it won’t be that bad, and in 2 months everything back to normal. They might well be right on virus timetable, but the economic damage HAS BEEN done. The fall out will be spread out in the months ahead.
it’s here.
The Sudden Economic Stop
by Calculated Risk on 3/13/2020 02:54:00 PM
I just spoke with a tile sub-contractor who mostly does remodels. He was completely booked for the next several months, and all of his jobs have cancelled for the next 8 weeks.
He has a great reputation – and a good network – and he has been busy for years. These cancellations caught him by surprise. He will have to layoff his workers until he finds work.
Yup. Like a neutron bomb went off.
Not surprised…I wouldn’t want a bunch of strangers in my house that might have had contact with this virus. The economic fallout from this is going to be much worse than anyone even realizes at this point….my neighborhood even seems like a complete ghost-town right now.
“Bernanke proclaimed in March of 2008 there would not be a recession.”
…
Survey of PROFESSIONAL forecasters February 2008:
The outlook for growth in the first half of 2008 looks much weaker now than it did three months ago, according to 50 forecasters surveyed by the Federal Reserve Bank of Philadelphia. However, the forecasters are not predicting a contraction. Growth in the current quarter is projected at an annual rate of 0.7 percent, down from the projection of 2.2 percent in last year’s fourth-quarter survey. The forecasters are pegging the probability of a downturn this quarter at 47 percent, as discussed in a section below. The forecasters expect growth of 1.3 percent in the second quarter, marking a downward revision from 2.3 percent previously, and they are assigning a probability of 43 percent to negative growth. The forecasters see growth of 2.8 percent in each quarter of the second half of the year.
How about psychic forecasters? Last year I told people that parts of the U.S. were in recession; it just wasn’t official. Then several months ago, while looking at shipping numbers, I had a bad feeling and called a friend and told her not to keep all her money in stocks and mutual funds. She wouldn’t listen to me and now she’s lost a chunk of money. As for me, I only own hard assets.
Anything fundamental regarding the market is out. Wait until job losses mount. American mind is to accumulate Toilet Paper. They want to just stuff themselves and then wipe themselves. Nothing else matters. Eating and wiping . Both holes need comfort. The pie hole and the hiney hole, nothing else matters.
The rail traffic fell dramatically at the rail yard near where I live last spring (2019).
It was pretty obvious then.
I don’t see how the US financial sector, insurers, etc., aren’t smoking holes in the ground because of this given what’s transpired.
The question that needs to be asked is what sort of ratios are we looking at for bail-ins? What happens when under-funded pensions must actually realize cuts to pensioners?
I have a major railway 6 miles to the east that I used to hear every night. Depending on weather conditions and wind speed/direction it would actually vibrate the walls and produce low frequency noise. That noise was heard nearly every night until the middle of last summer. I hardly hear them any more. Maybe once a week.
Yeah, I’ve been driving for Uber consistently for 4 years in the Los Angeles metro. 2016-2017, people were throwing away their money like there was no tomorrow. Then in 2018, there was a noticeable decline in those “wasteful” trips. Then 2019 got even leaner…most Uber rides seemed very judiciously planned by that point. Then 2020 rolls around, and it’s even tougher…then a very convenient virus shows up to “cause” the recession that I’ve seen happening for two years!
Exactly. Stand by for a kitchen sink quarter. Every hairbrained loser project accumulated since Q1, 2009 is about to be discovered to have been fatally damaged by the effects of Covid-19.
A second prediction: The C suite gangs who have driven corporate debt to the hilt buying back overpriced stock to goose their comp plans will have slipped out the back door by the time this one hits bottom…again.
“A widespread myth persists that the stock market is a leading indicator of recessions”
A widespread myth persists that the stockmarket is anything at all; aside from an institution to facilitate Fed redistribution of wealth; from productive people to idle, incompetent dunces; in central bank infected, financialized dystopias.
it trades on perception and creates illusion. It actually is a wealth transfer mechanism to take money from the masses to the few. Sorry no retirement for you.
Hold your horses. Are you suggesting that all retirees receiving pensions are incompetent dunces? Central bankers have herded the pension industry into the stock market, and now have to juggle yet another ball in the air.
Add up how many dollars, counted one by one, you have “put in” to “the market.”
Then subtract out the number of those dollars taken out over the years. By way of salaries, commissions, “capital gains” etc.
How many dollars do you reckon are left? Hence that you have realistically “put aside” for retirement, and not just handed to conmen?
Dang, I thought the stock & commodities markets are just very convenient, legal casinos.
Not just the stock market. By the time this is cleared (expect it to take a few years in its entirety) both stocks and bonds will have been hammered and pensioners suffering PTSD.