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Not buying the rebound Add to ...

Remember all the recession-talk a few weeks ago? You know, the fear that the U.S. economy was sliding and central bankers weren’t able to do much about it? Well, with the impressive stock market rally since Oct. 4, these concerns have been largely tossed aside – but they haven’t completely vanished. Indeed, some observers suggest the stock market is taking an overly rosy view on things.

John Hussman of Hussman Funds believes that investors are simply confusing lagging indicators (which have been relatively upbeat) with leading indicators, as he explained in a note to clients.

“Leading evidence is not only clear, but on a statistical basis is essentially certain that the U.S. economy, and indeed, the global economy, faces an oncoming recession,” he said. “The simple fact is that the measures that we use to identify recession risk tend to operate with a lead of a few months. Those few months are often critical, in the sense that the markets can often suffer deep and abrupt losses before coincident and lagging evidence demonstrates actual economic weakness. As a result, there is sometimes a “denial” phase between the point where the leading evidence locks onto a recession track, and the point where the coincident evidence confirms it.”

For an example, he doesn’t have to look far. In November 2007, evidence of a recession was around, yet the U.S. economy generated another two months of payroll growth, fooling some investors into believing that things weren’t so bad. Mr. Hussman even pointed out that after Bear Stearns failed in March 2008, a brief stock market rally put the S&P 500 within about 10 per cent of its high. You know what happened next.

“At present, the S&P 500 is again just 10 per cent below the high it set before the recent market downturn began,” he said. “In my view, the likelihood is very thin that the economy will avoid a recession, that Greece will avoid default, or that Europe will deal seamlessly with the financial strains of a banking system that is more than twice as leveraged as the U.S. banking system was before the 2008-2009 crisis.”

Follow on Twitter: @dberman_ROB

 

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