U.S. recession is not only a risk but an imminent likelihood...John Hussman....

January 18, 2016

An Imminent Likelihood of Recession

John P. Hussman, Ph.D.

Since October, the economic evidence has shifted from supporting a growing risk of recession, to a guarded expectation of recession, to the present conclusion that a U.S. recession is not only a risk but an imminent likelihood, awaiting confirmation that typically only emerges after a recession is actually in progress. The reason the consensus of economists has never anticipated a recession is that so few distinguish between leading and lagging data, so they incorrectly interpret the information available at the start of a recession as “mixed” when, placed in proper sequence, the evidence forms a single, coherent freight train.

Much of the disruption in the financial markets last week can be traced to data that continue to amplify the likelihood of recession. Remember the sequence. The earliest indications of an oncoming economic shift are observable in the financial markets, particularly in changes in the uniformity or divergence of broad market internals, and widening or narrowing of credit spreads between debt securities of varying creditworthiness.

The next indication comes from measures of what I’ve called “order surplus”: new orders, plus backlogs, minus inventories. When orders and backlogs are falling while inventories are rising, a slowdown in production typically follows. If an economic downturn is broad, “coincident” measures of supply and demand, such as industrial production and real retail sales, then slow at about the same time. Real income slows shortly thereafter.

The last to move are employment indicators - starting with initial claims for unemployment, next payroll job growth, and finally, the duration of unemployment. 

Our concerns about both the economy and the financial markets would be less immediate if we were to observe uniformly favorable market internals across a broad range of individual stocks, industries, sectors, and security types (including debt securities of varying creditworthiness). Instead, we currently observe negative leadership, weak breadth, and dismal participation, with only 17% of individual stocks still above their own respective 200-day moving averages. Meanwhile, credit spreads spiked to fresh highs last week.

DYI Comments:  Stocks being highly correlated to prosperity an oncoming recession will knock the legs out from this market.  Due do excessive valuation a 45% to 60% decline would be expected.  So hold onto your cash as better valuations lie ahead.

The Great Wait Continues....

DYI