The False Economic and Stock Market Recoveries

By: Money_and_Markets

Claus Vogt writes: The stock market has been jumping for joy over the last few days. Yet I can’t see exactly what investors are cheering about. Heck, two of America’s most prominent companies, GM and Chrysler, just declared bankruptcy!

It seems as though everyone is so wrapped up in the sighting of supposed “green shoots” that they’re willing to ignore even the most calamitous events.

Yet I see a very strong reason to believe that the U.S. is not yet on a solid road to recovery, despite what some of the data might say. That’s because …

Major Recessions in the Past Have Been Interrupted by Small Upticks in Growth

The Conference Board’s Index of Leading Economic Indicators (LEI) is one of the best tools to forecast recessions. As such it plays a major role in my macroeconomic analysis tool box. It has called every recession since 1960, the current one included. And I also use it to decide just when a given recession might finally be coming to an end.

So what is the LEI saying now?

In April, the LEI’s year-over-year change was minus 3 percent. That’s definitely better than March and February when the reading was minus 3.9 percent after downward revisions.

And even though a negative reading still clearly signals “recession,” many hope that the low point of this indicator and of the recession might be behind us.

But take a look at the following chart of the LEI for 1960-2009 …

Source: Bloomberg

With just a little hook to the upside you can see that it’s very early in the game of predicting the next recovery. If this is truly the beginning of a recovery, that little hook should very soon be followed by a sharp rise and possibly positive readings.

Moreover, do you see that other little hook at the beginning of 2007? That was when most economists and central bankers were chatting about a soft landing and just a minor stall in growth!

You see, false recovery signals are nothing new …

In 1980-82, the LEI even experienced a real whipsaw as did the economy. Shortly after the all-clear signal was given, the indicator turned down again as did the recession. And a much more severe second part of that double-dip recession took place.

And Even If the LEI Has Hit a Cyclical Low, That Doesn’t Mean the Recession Is Over!

History shows that the time between the LEI’s low and the beginning of the economic recovery can be as much as four quarters apart!

Wall Street doesn’t want you to be patient. They want you to act: To buy, buy, buy.

If the economy were to suffer another three or four quarters of recession, a host of additional problems, such as skyrocketing unemployment, could emerge. Some even jeopardizing the very recovery everybody is hoping for.

Patience is imperative for long-term, successful investors.

However, Wall Street does not want you to be patient. They want you to act: To buy, buy, buy. Last year demonstrated how bad this advice can be.

So for now, I strongly suggest you consider staying the bearish course and expecting a return of the bear market.

Best wishes,

Claus

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