Recession & Macro Cycle Forecasting

Investors are better off served with a systematic method for investing.

The market climbs a wall of worry. There is always something to worry about in the economy. Most people are better off following objective indicators rather than headlines.

Source: Michael Batnick

20%+ corrections don’t happen very often:
Source: Ned Davis Research

Most large corrections/drawdowns in the equity market happen during periods of economic weakness:
Source: Pension Partners

Resources for Recession and Macro Cycle Forecasting:
Jeff Miller / A Dash of Insight – Weekly Indicator Snapshot

Paul Novell / investingforaliving

Capital Spectator – US Business Cycle Risk Report Monthly

RecessionAlert WLI

Simple Stock Monitor

CMGWealth On My Radar

Calculated Risk
The Bonddad Blog – Weekly Indicators

If you want to go the extra step and build your own model instead of following the resources above, the articles below will lead you in the right direction:
– Data revisions:
Recession – Just how much warning is useful anyway
– Is Recession Risk monitoring useful for investing?
via Capital Spectator
– Ahead of the Curve Business Cycle Indicators by Charles Bolin (“In this article, I look at the inter-relationship between these indicators. I use k-median clustering described in “Data Smart: Using Data Science to Transform Information into Insight” to segment the 37 composite indicators into four groups which are loosely long, short and coincident indicators. The distinction in names between the two short leading indicator groups is their correlation to my Recession Indicator. “) Index
Georg Vrba/iMarketSignals

ITR Economics
– Book: Prosperity in the age of decline
– Data Prep:
– Sample presentation:
Quantitative Indicators occasionally change and or need interpretation, for example:

Francois Trahan
– Book: The Era of Uncertainty
– Some charts from the book:

-The article highlights problems with the libor-ois and swap spreads as well as the yield curve ( in the wake of ZIRP and other changes).
-Some people use the unemployment rate trend vs 12MMA for timing the macro cycle ( . However in this case the potential negative signal is due to increased labour force participation. “The unemployment rate has stopped declining and looks set to increase a bit in coming months. Traditionally, a rising unemployment rate only happens as the economy slides into a recession. Things are very different this time around, however. The unemployment rate is moving higher not because more and more people are getting laid off, but because more and more people are deciding they’d rather work than sit on the sidelines. This is arguably the first time this has happened in modern times. Don’t be worried, therefore, by a rising unemployment rate—it doesn’t mean what it used to mean.”
– The recent widening in corporate credit spreads was mainly focused in the energy and commodity company sectors, although it caused the whole spread to widen.
– Industrial production has also declined predominantly due to weakness in energy and commodity company sectors

Business Cycle Frameworks:

*Raoul does a great job of conceptualizing different cycles. However a composite of signals should be used to ensure confidence. It is a tradeoff between timeliness and strength.

Generic overview of the debt cycle, not directly related to forecasting: