Why Expect a Recession Coming?

 2 January 2019
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Someone  asked,   “ Presently,  the companies are doing fine;  earnings are great.  US also has very low jobless rates and jobless claims. Why expect a recession now ?”.    

This is a fair comment if we study the following charts:

The US unemployment rate has dropped from 9.4% Jan 2011  to 3.3% in Jan 2018 and the S&P 500 earning and economy indicators were great and still rising at end of 4th Quarter.   Many Analysts are not expecting any recession to come until after 2020.

Why Think about Recession?

Simply put,  the market participants are expecting a recession to come.  Their buying and selling,  their  movement of wealth and other market behaviors are telling us: they are in fear. 

The yield curve is inverting with more people buying  the long term bonds as safe heaven.  More and more people are relying on credit cards to get ends meet.  Debts are piling up.  Housing prices every where starting to plunge (China, US,  Hong Kong,  Australia, Canada) and people spending less and less on luxurious items and goods. Motor vehicle sales are plunging in some markets.

Examples of Such Recessions Happening?

If one scans through the historic data,  it is not difficult to find examples that the market were doing fine one instance and fell into recession the next,  all within a few days or weeks.

These type of recessions happened in 1929,  1940 & 1973. Then the market was enjoying earning growth of  more than 15%. The economy and company earnings then were still expanding and growing.  

In Oct 1929 for example,  everyone were expecting a good year ahead.  Some Americans went for Christmas Holiday in England.  On their way back,  this video document said "They have left England a wealthy man,  they docked in New York without a penny."

The following charts that  plotted between S&P and the S&P Earning Index (GAAP) for the 3 period  are shown below

Name of  Recession	Period	Length of recession	Peak Jobless rate	Market loss 1 yr later	Double Click to enlarge the pictures
Great Depression	Aug 1929-Mar 1933	3 years 7 months	26.7%	-28.5%
Recession of 1937–1938	May 1937-June 1938	1 year 1 month	17.8%	-18.0%
1973–75 recession	Nov 1973-Mar 1975	1 year 4 months	9.0%	-30%

Why Market Ignored the Economical Results?

There can be many reasons   Some market participants like the Hedge Fund Managers might have known something that common people arenot aware of and started to adjust and re-balance  their portfolios.  They moved their wealth around.  For example,  people dealing with leveraged loans and margin loans might feel the pressure first because many of their investments are at risk. They might have "smell" something bad and "fishy".   Their wealth movement could have alarmed the market and ordinary layman like us.

Alternate Views

There are many analysts offering different views about the present stock market trend.  This article has an argument that "The  S&P 500 monster rally is just getting started."   Its supporting view was based on this chart that showed S&P touching the support of 200 week moving average.

 What's Next?

 During a market correction,  there is always a market rebounce as "Nothing Goes to Hell in a Straight line,  not even Stocks."   . The readers are advised to pay attention to the economic development and make their own investment decisions.

 Disclaimer:  This article is for information and  educational purposes.   Readers are advised to  conduct their own research and study to make their  own investment decisions.

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