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Warning: Stocks are NOT Good Indicators of When a Recession is Coming

This morning while catching up on my podcasts and economic news I listened to one of my favorite stock commentators make a comment which made me do a double take. His insistence that stocks were not indicating a recession was a solid determination that no economic downturn was in the offing.

Unfortunately for this frequent FBN guest who has a daily podcast, recent history proves him very, very wrong.

With the elections less than a month away, economic instability visible to anyone with two functioning brain cells, and geopolitical events dancing on the razor’s edge a quick walk through history versus equities is in order.

The .com Bust Recession

The “narrative” used by the media was that the terrorist attacks caused the recession of 2001 and that was then end of that. The reality is far different as the NBER declared the recession began a full six months before September 11th and the economic hit which occurred afterward.

The indications that there might be a recession after the .com bubble semi-officially popped in March 2000 however, were few and far between if one had faith the pump and dump markets one year later.

The S&P 500 offered some warning signs on a broad scale.

Recessions are indicated by the shaded area in all charts presented below.

The trend was the warning sign in the summer of 2000 but everyone seemed to ignore it as the belief was the internet was the future and there would be a bounce back with stronger economic growth. The major economic stocks from various industries seemed to support that theory.

The three stocks selected below were chosen to validate this story from 2001. This idea was based on their importance to the sustainability of economic growth during that era.

Caterpillar for example has always been considered a leading indicator for the economy.

This is where using equities to predict an economic contraction can be tricky. If one were to believe that there was a problem in October of 2000 due to the decline of Caterpillar then see the skyrocket in January of 2001, there would appear to be no way a recession was incoming.

JP Morgan-Chase is another prime example:

If one looked at the irregular market activity between the summer of 2000 through January of 2001, no way a recession appears to be on the horizon. Yet there it is.

Ford Motor, a good indicator for the average middle class consumer, especially for pickup truck purchases is another barometer for the health of the economy at the Main Street level.

Again, no warning, not hint, nothing. This is why using individual stock performance, especially those leading the bubble may not be a good measurement of economic health.

The start of the 2007 Great Recession provides even more lessons.

2007-2009 Great Recession

This time, let us begin the review with the individual stocks before the broader S&P 500.

Caterpillar tried to warn everyone there was trouble ahead:

After the peak in the summer of 2008, this equity sent a warning but the rally into October of 2007 seemed to be more of a head fake. Seem familiar?

What about JP Morgan-Chase:

The quiet Fed bailout in late August of 2007 threw the market for a loop and caused many to believe that the housing contagion was being contained and there was no possibility of a recession. The financial media by and large confirmed this by repeatedly saying the bull would live on and the housing problem was going to be a non-issue.

Ford Motor seemed to indicate the same:

Obviously credit was still flowing free and easy for the consumer so there was no way there could be an economic contraction, right?

The S&P 500, despite a rocky road after some mortgage companies failed along with a sudden surge in bank failures offered no indication that an economic contraction might occur in December of 2007:

Thus after the Fed Discount Rate cut on August 17, 2007 which many considered to be a bailout of some bad positions held by Goldman Sachs seems to hold a similar parallel to what appears to now be an unnecessary Fed Funds Rate cut in September of this year.

It is way too early to tell, but the decline in underlying economic activity and warnings from the transportation sector are indicating all is not well with the economy nor the consumer class. Using equities as one’s guidepost in this new era of modern monetary theory economics may not be the best idea.

And as in the past, once again the Austrian economic theorists might well be proven right again; the excessive inflationary impulse introduced by a new twist on Keynesian economics under the guise of MMT will result in massive economic contractions with asset price devaluations.

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