May 24, 2015
Existing home sales of just over 5 million (annualized) in April were a bit disappointing. Since the recession, there have been only about six months that sales have been above a healthy benchmark of 5.2 million set in the late 1990s to early 2000s.
Procession, not Recession Indicator
When reporting first quarter results, many of the big multi-national companies in the Dow Jones noted that sales had declined in Europe. The broader stock market, the SP500, has not had a 5% decline for three years and is due for a correction. Greece is likely to default on their Euro loans in June. Combine all of these together and some pundits predict a 30 – 40% market correction this summer and/or a recession this year. Corrections can be overdue for a long time. Some treat the stock market as though its patterns were almost as predictable as a pregnancy. Here’s an early 2014 warning that finds a chilling similarity between the bull market of today and, yes, the one before the 1929 crash.
Bull and bear markets tend to confound the best chart watchers. The bear market of 2000 – 2003 was not like that of 2007 -2009. Some argue that market valuations are like a rubber band. The longer prices become stretched, the harder the snapback. However, the data doesn’t show any consistent conclusion.
The 2003 – 2007 bull market ran for 4-1/2 years without a 5% correction. That one didn’t end well, as we all know. The mid-1990s had a three year stampede from the summer of 1994 to the summer of 1997 before falling more than 5%. After a brief stumble, the market continued upwards for a few more years. Turn the dial on the wayback machine to the early 1960s for the previous stampede, from the summer of 1962 to the spring of 1965. That one ended much like the 1990s, dropping back before pushing higher for a few more years. These long runs occur infrequently so there is not much data to go on but the lack of data has never stopped human beings from predicting the end of the world.
April’s Leading Economic Indicator was up .7%, above expectations, but this increase was helped along by an upsurge in building permits. This series has been unreliable in predicting recessions and its methodology has been revised a number of times to better its accuracy. Doug Short does a good job of tracking the history of this composite and here is his update of April’s reading.
A much more consistent indicator of coming recessions is the difference in the interest rates of two Treasury bonds. The time to start thinking about recessions is when the 10 year interest rate minus the two year rate drops below zero. The current reading simply doesn’t support concerns about recession in the mid-term.
The Federal Reserve has made it easy for us to track this flattening of the yield curve. They even do the subtraction for us. The series is called T10Y2Y, as in “Treasury 10 year 2 year.”