Consumer Spending Strengthens – Recession Risk Falls 9/7/2016
Before we get going, I was recently asked what the point is of understanding whether or not we are entering a recession. This person had been told by their broker that to “ride the rallies you have to ride out the valleys.” Catchy, right?
The reason to understand when the economy is falling into recession is because around 80% of the time the stock market sells off hard when it does. The market usually takes a few months after the recession actually starts to figure it out, but once it starts selling most of the time it keeps going far longer than anyone other than a billionaire likes to see. The other reason- when the market itself starts into recessionary selling, 70% or more stocks follow the market down.
Think of it this way. If you were getting into your car this morning and you received a credible message that there was nearly an 80% chance you would get in a car accident today, and that about 70% of the cars on the road were also going to be involved in a crash today, would you crank it up and head for the freeway or would you decide to preserve your car (and maybe more than that) and stay at home?
Now that doesn’t mean that you should stay at home at all costs, but if those were my odds for the day, I’d sure like to know about them before I decided to take a drive.
So, my firm and I use what’s called the Recession Probability Indicator (“RPI”) to identify whether or not we are in (or entering) a recession. Think of it as a lookout in the crow’s nest of an old school sailing ship – he’s keeping an eye out for storms or rocks so the ship gets where it’s heading safely.
My firm and I use the RPI for the same reasons – to help steer client accounts away from storms and rocks so they can live their lives focused on what’s important to them rather than worrying about the next market crash. We aren’t going to see every single rock or approaching storm, but if we weren’t looking we wouldn’t see any of them. I think of it as Wealth Preservation 101. It’s basic.
Absent a recession, it’s best to stay invested. If you’d like more information on this idea, follow this link —> CLICK HERE.
So, if recession is what we need to pay attention to, are we in one yet?
Consumer activity drives about 70% of the American economy and spending is still rising at +4.2% vs. last quarter. As a result, we are seeing a slightly reduced probability of recession vs. earlier in the year. This is subject to change, but for now the investment climate is stable and likely to stay that way for a while longer.
If you don’t know how the Recession Probability Indicator works, CLICK HERE. Make sure to scroll down to take a look at the tables below the description.
Below is an updated graph of the RPI. It runs on a 2 – 3 month lag.
If you’d like to take a look at the American Institute of Economic Research business conditions update CLICK HERE.
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To Smarter Investing,
Chief Market Strategist
ACI Wealth Advisors, LLC.
Process Portfolios, LLC.