So
here we are again; the Hussman commentary comes out negative and the markets
are down. Are they related? I don’t know, but here’s an interesting point
from the Hussman weekley commentary. (sorry if this is repetetive; but it's important)
Monday
John Hussman, PhD wrote, “Overall, an economic
downturn remains the most likely prospect, and it's not at all clear that the
latest employment report changes that risk...To begin, it's useful to
understand how the Bureau of Labor Statistics
calculated the 243,000 increase in employment that it reported for January. Total non-farm employment in the U.S., before seasonal
adjustments, fell by
2,689,000 jobs in January. However, because it's typical for the economy to
lose a large number of jobs after the holidays, largely in retail trade,
construction, and manufacturing, the BLS estimated that the "normal"
seasonal decline in employment should
have been 2,932,000 jobs in January. The difference between the two
numbers, of course, was 243,000 jobs, which was reported as an increase in employment.”
He also analyzed the BLS adjustment and noted that the
adjustment factor used was unusually large. He suggested that job growth has usually been
positive prior to recessions, and since it is a lagging indicator, it is of
little help in predicting recession.
The most important point of his commentary regarded the current
practice of many pundits to confuse lagging indicators with leading indicators. As he said, “...we shouldn't expect weak job
reports to lead recessions,
though the year-over-year growth rate in payrolls invariably drops below 1.5%
in the early months of a downturn (a level that we're still below).” – From Hussman Funds, Weekly Market Comment, 9 Jan 2012 at...
I should note that Mr. Hussman was one of the few calling for a
recession back in the summer of 2008 while the market advanced and most pundits
were acting like the worst was in the past. At the time the S&P 500 was
around 1400. It later bottomed below 700 so we really can’t afford to ignore
John Hussman’s views, though he is not predicting a 2008-type collapse at this
point, nor is he predicting that the market will fall now.
Mr. Hussman frequently points out that the market may continue
to advance as the market climate becomes more hostile to stocks, so (according
to him) we shouldn’t be buoyed by the strong climb in the S&P 500 recently
either.
I
am not an economist so I really don’t have an educated opinion regarding
recession. As I’ve suggested before, for
the purpose of stock market analysis, I only care about the market’s opinion of
the possibility of recession. (Recession is a huge amount of pain for many, so
I care, but for the purposes of market timing, I really do only care about the
market’s opinion.)
If
the market anticipates a recession, cyclical stocks (those stocks that respond
to the business cycle) will show it first as the professionals start moving out
of cyclical stocks and into more defensive positions. So a
simple test of recession risk is to look at the relative performance of the
Morgan Stanly cyclical index and the S&P 500. At this point cyclical stocks are performing
better that the S&P 500 suggesting that we will not have a recession in the
US anytime soon.
Markets
tend to overshoot the mark however, so irrational exuberance could also be at
play in this simple recession indicator thus limiting its effectiveness. I am still looking at this as a possible NTSM
indicator and I haven’t back tested the data fully. In the interim, I think it is positive for
the markets that cyclical stocks are outperforming the S&P 500; but really
I must point out that both Mr. Hussman and I may be right – further market
advances…followed by recession.
NTSM
SYSTEM UPDATE
NTSM
analysis remains BUY today.
I
bought back into the stock market at S&P 500, 1155 on 7 Oct after the 6 Oct
NTSM buy signal. I remain 100% long in
the long term portfolio (100% stocks in the 401k.). (See the page “How to Use
the NTSM System” – the link is on the right side of this page).
