Best of the Week
Most Popular
1. Investing in a Bubble Mania Stock Market Trending Towards Financial Crisis 2.0 CRASH! - 9th Sep 21
2.Tech Stocks Bubble Valuations 2000 vs 2021 - 25th Sep 21
3.Stock Market FOMO Going into Crash Season - 8th Oct 21
4.Stock Market FOMO Hits September Brick Wall - Evergrande China's Lehman's Moment - 22nd Sep 21
5.Crypto Bubble BURSTS! BTC, ETH, XRP CRASH! NiceHash Seizes Funds on Account Halting ALL Withdrawals! - 19th May 21
6.How to Protect Your Self From a Stock Market CRASH / Bear Market? - 14th Oct 21
7.AI Stocks Portfolio Buying and Selling Levels Going Into Market Correction - 11th Oct 21
8.Why Silver Price Could Crash by 20%! - 5th Oct 21
9.Powell: Inflation Might Not Be Transitory, After All - 3rd Oct 21
10.Global Stock Markets Topped 60 Days Before the US Stocks Peaked - 23rd Sep 21
Last 7 days
AI Tech Stocks State Going into the CRASH and Capitalising on the Metaverse - 25th Jan 22
Stock Market Relief Rally, Maybe? - 25th Jan 22
Why Gold’s Latest Rally Is Nothing to Get Excited About - 25th Jan 22
Gold Slides and Rebounds in 2022 - 25th Jan 22
Gold; a stellar picture - 25th Jan 22
CATHY WOOD ARK GARBAGE ARK Funds Heading for 90% STOCK CRASH! - 22nd Jan 22
Gold Is the Belle of the Ball. Will Its Dance Turn Bearish? - 22nd Jan 22
Best Neighborhoods to Buy Real Estate in San Diego - 22nd Jan 22
Stock Market January PANIC AI Tech Stocks Buying Opp - Trend Forecast 2022 - 21st Jan 21
How to Get Rich in the MetaVerse - 20th Jan 21
Should you Buy Payment Disruptor Stocks in 2022? - 20th Jan 21
2022 the Year of Smart devices, Electric Vehicles, and AI Startups - 20th Jan 21
Oil Markets More Animated by Geopolitics, Supply, and Demand - 20th Jan 21
WARNING - AI STOCK MARKET CRASH / BEAR SWITCH TRIGGERED! - 19th Jan 22
Fake It Till You Make It: Will Silver’s Motto Work on Gold? - 19th Jan 22
Crude Oil Smashing Stocks - 19th Jan 22
US Stagflation: The Global Risk of 2022 - 19th Jan 22
Stock Market Trend Forecast Early 2022 - Tech Growth Value Stocks Rotation - 18th Jan 22
Stock Market Sentiment Speaks: Are We Setting Up For A 'Mini-Crash'? - 18th Jan 22
Mobile Sports Betting is on a rise: Here’s why - 18th Jan 22
Exponential AI Stocks Mega-trend - 17th Jan 22
THE NEXT BITCOIN - 17th Jan 22
Gold Price Predictions for 2022 - 17th Jan 22
How Do Debt Relief Services Work To Reduce The Amount You Owe? - 17th Jan 22
RIVIAN IPO Illustrates We are in the Mother of all Stock Market Bubbles - 16th Jan 22
All Market Eyes on Copper - 16th Jan 22
The US Dollar Had a Slip-Up, but Gold Turned a Blind Eye to It - 16th Jan 22
A Stock Market Top for the Ages - 16th Jan 22
FREETRADE - Stock Investing Platform, the Good, Bad and Ugly Review, Free Shares, Cancelled Orders - 15th Jan 22
WD 14tb My Book External Drive Unboxing, Testing and Benchmark Performance Amazon Buy Review - 15th Jan 22
Toyland Ferris Wheel Birthday Fun at Gulliver's Rother Valley UK Theme Park 2022 - 15th Jan 22
What You Should Know About a TailoredPay High Risk Merchant Account - 15th Jan 22
Best Metaverse Tech Stocks Investing for 2022 and Beyond - 14th Jan 22
Gold Price Lagging Inflation - 14th Jan 22
Get Your Startup Idea Up And Running With These 7 Tips - 14th Jan 22
What Happens When Your Flight Gets Cancelled in the UK? - 14th Jan 22

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Is the Fed Too Late to Head Off a US Recession?

Economics / US Economy Dec 04, 2007 - 09:41 AM GMT

By: Donald_W_Dony

Economics Best Financial Markets Analysis ArticleWith the ongoing weakness of many of the key leading indicators spurred on by the subprime mortgage debacle, has the U.S. already started to slip into a recession? We know the housing and banking sectors remain in a free fall with no apparent evidence of a bottom and that consumer confidence has dramatically declined in recent months. But is that the signal of the start? And what is the definition of a recession?


The standard believe is that a recession begins with back-to-back quarters of negative growth; but that is simply a rule of thumb and does not always apply. Take for example in 2001, not only did we not have successive quarters of negative GDP growth in that year but the average for the year was almost 1%.

Is the central bank too late this time around?
There is no doubt that the markets are braced for repeated Fed rate easings, first on December 11 and later in 2008, but the real question is whether the Fed is simply starting too far behind the economy at this point? The central bank has a long history of starting rate cuts too late. For example, the Fed thought it had things under control having cut rates almost 100 basis points by July 1990 but the economy still managed to slide into a recession by September. During the last cycle, the Fed had cut rates by 150 basis points before the recession began and the easings, did not stop the economy from running its course.

But how do we know if the U.S. has begun to fall into a recession? One very tried and true measurement that tells us if a recession has already started, is the unemployment rate. Once it rises at least 0.5ppt from the cycle low, and it does not matter if that low is 2% or 7%, the economy has always slipped into recession. This acid test works 100% of the time. It is important to remember that it is not the level that matters but the change. (See Chart 1). We know that the jobless rate hit bottom in March at 4.4%; so basically, the U.S. is on the threshold now at 4.9%.

Another time tested indicator of market peaks and loaming recessions is the shift in consumer spending from discretionaries to staples (Chart 2). Though this dance occurs regularly near the end of a each business cycle, it is most important to note when in combination with record high oil prices (Chart 3). This drain on consumer spending caused by high energy costs plus the clear move toward defensive stocks has herald the crest in major equity markets 4-out-of-5 times since 1960.

Before there is any real concern, it pays to note that recessions are an important part of the business cycle. There has been as many recessions as expansions, but they just happen to be much shorter in duration. They last, on average, about 11 months and tend to move the level of GDP down by 2%.

Recessions are simply haircuts and not Armageddon. They are actually very necessary because they help to squeeze out the excesses from of the economy.

Investment approach: The worst performing S&P sectors during a recession have been consumer discretionary and financials which decline, on average, by 30%. The best performing sectors historically were telecomm, health care and utilities; the classic defensives.

More economic and financial market research is available in the December newsletter. Go to member login and follow the links.

Your comments are always welcomed.

By Donald W. Dony, FCSI, MFTA
www.technicalspeculator.com

COPYRIGHT © 2007 Donald W. Dony
Donald W. Dony, FCSI, MFTA has been in the investment profession for over 20 years, first as a stock broker in the mid 1980's and then as the principal of D. W. Dony and Associates Inc., a financial consulting firm to present.  He is the editor and publisher of the Technical Speculator, a monthly international investment newsletter, which specializes in major world equity markets, currencies, bonds and interest rates as well as the precious metals markets.   

Donald is also an instructor for the Canadian Securities Institute (CSI). He is often called upon to design technical analysis training programs and to provide teaching to industry professionals on technical analysis at many of Canada's leading brokerage firms.  He is a respected specialist in the area of intermarket and cycle analysis and a frequent speaker at investment conferences.

Mr. Dony is a member of the Canadian Society of Technical Analysts (CSTA) and the International Federation of Technical Analysts (IFTA).

Donald W. Dony Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in