Feverpited
The BCI at 261.1 is close to the average of the previous four weeks and similarly for the BCIp now at 16.1 (see Figure 1, magenta curve) and based on past performance, a recession is signaled at the earliest 11 weeks but no later than 24 weeks. BCIg, the six-month smoothed annualized growth rate of BCI, now at 1.8, is below the average of the past four weeks. (see Figure 1, blue curve). When BCIg crosses zero on the upside, then from past performance it signals a recession with an average advance of 12 weeks.
Figure 1 depicts BCIp, BCI, BCIg and the S&P 500 along with the thresholds (red lines) that must be crossed in order to call a recession. We note here that BCIp has firmly crossed the threshold of 25 on the downside. Historical data from the last recession shows that at this value, the economy never recovered to avoid a recession. (iMarketSignals)
Figure 2 plots the traces of BCIw to the past recession with the current value of BCIw with its endpoint at the best-fitting average value of past recessions (iMarketSignals)
Description of the iM Business Cycle Index
In 2013, we developed our Business Cycle Index using the following basic economic data:
10-Year T-Bill Yield (Daily) 3-Month T-Bill Yield (Daily) S&P 500 (Daily) Seasonally Adjusted Continuing Claims (Weekly) All Employees: Total Private Industries (Monthly) New Homes For Sale (Monthly) ) New homes sold (monthly)
The complete data set is available on FRED from 1967. When combining the components of the index, the “real time” aspect was taken into account, i.e. the data does not included in the index only on its publication date and not on the date indicated in the series.
The BCI on its own does not provide recession signals, but after further manipulation of the series, two indicators are extracted that reliably signal impending recessions:
The six-month smoothed annualized growth rate of an economic series is a well-established method for extracting an indicator from the series. We use this method to obtain BCIg (growth). Here, BCIg is the growth rate calculated with 6.0 added, which generates, on past performance, an 11-week average recession signal when BCIg falls below zero. We also found that the BCI is receding in a well-defined way from its cyclical peak before recessions. This allowed the extraction of the alternative indicator BCIp (deviation from the previous peak of BCI). Past performance shows that on average 20 weeks before a recession, the BCIp value broke through the 25 mark on the downside. In our 2014 article, iM’s BCIw: A Weeks to Recession Indicator, we show how the BCIp (deviation from previous BCI peak) indicator can be transformed into a BCIw (weeks to next recession) derived from the tracks Previous BCIp towards the NBER defined recession.
Both BCIg and BCIp indicators could be used as a sell signal for ETFs that track stock markets, like SPY, IWV, VTI, etc., or stocks in general.
In Table 1, we record for each recession the pre-recession peak of the S&P 500, the day value of the BCIg signal, and the subsequent lowest value of the inter-recession trough. From these, we calculate the loss avoided by exiting the market on the day of the BCIg signal.
Table 1: Avoidance of losses in SPY when exiting the BCIg recession warning.
Note
1
2
3
4
5
6
7
8
Recession
peak
Signal
Hollow
(PT)/P
(ST)/S
(PT)
(ST)
(ST)/(PT)
January-70
106.16
93.24
69.29
36.1%
25.7%
36.87
23.95
65.0%
Dec-73
120.24
103.36
62.28
48.2%
39.7%
57.96
41.08
70.9%
Feb-80
115.2
100.3
98.22
17.1%
2.1%
16.98
2.08
12.2%
Aug-81
140.52
128.64
102.42
27.1%
20.5%
38.1
26.22
68.8%
Aug-90
368.95
332.92
295.46
19.9%
11.3%
73.49
37.46
51.0%
Apr-01
1520.77
1326.82
965.8
36.8%
27.2%
554.97
361.02
65.1%
Jan-08
1565.15
1508.44
676.53
56.8%
55.2%
888.62
831.91
93.6%
Average of all recessions
34.6%
25.9%
60.9%
Column Notes:
S&P 500 peak during 1 year period before recession S&P 500 on signal date iM-BClg S&P 500 trough during recession %-loss from peak to trough %-avoided loss from signal to trough Absolute loss from peak at trough Absolute signal loss at trough % loss avoided from peak to trough avoided Click to enlarge
Following the BCIg signals of our recession indicator would have avoided on average about 61% of the total market decline, from pre-recession highs to inter-recession lows, as shown in the last column of Table 2. We can see in column 5 that exiting the market on the signal dates would have avoided average losses of around 26%. Had one experienced the peak of the market, one could have avoided the average 35% decline as shown in column 4. Prior to the 2008 recession, the BCIg exit signal occurred almost when the market peaked .
Figure 3 plots the history of BCI, BCIg, and LOG (S&P 500) since July 1967, and Figure 4 plots the history of BCIp, i.e. 56 years of history, which includes eight recessions, each of which the BCIg and BCIp managed to indicate in a timely manner; the weeks leading up to a recession are shown on the plots.
iMarketSignals
iMarketSignals
