MorningWord 3/28/16: Under the Big Top?

by Dan March 28, 2016 10:22 am • Commentary

In case you missed it, on Friday, Q4 2015 GDP was revised, per Bloomberg:


Another Bloomberg story, dissecting the Q4 GDP, lays out a concern:

Yet beyond the headline number, there is a reason for some concern. Corporate profits plunged 11.5 percent in the fourth quarter from the year-ago period, the biggest drop since a 31 percent collapse at the end of 2008 during the height of the financial crisis. For 2015 as a whole, pretax earnings fell 3.1 percent, the most in seven years, according to the Commerce Department.


There are many market participants and pundits who will say GDP is backward looking, I certainly understand that, but what’s different this time is that after 7 years of unprecedented global easing, with the U.S. just finishing its first quarter above a zero interest rate boundary in 8 years, GDP is going the wrong way after 2014 at 2.4%, the first three quarters of 2015 at 2.4% and the last revised closer to 1% than 2%.

The two Bloomberg charts above speak to the potential of a recession in the U.S.  Here is one thing I do know, a recession is coming. But your guess is as good as mine when. As Michael Batnick, who writes the Irrelevant Investor blog opined on March 8th (Are We Due For A Recession?):

Are we due in the sense that it has been a while since the last recession? Sure. Since 1926, recessions have happened on average every 59 months. We’re currently 80 months removed from the last recession.

Are we due in the sense that stocks have gone too far? Sure. The S&P 500 has risen on average 111% in between recessions; currently stocks are up 142% since June 2009.

Michael’s post is very thorough, so be sure to read, but for this discussion I want to merely focus on his data about stocks leading a recession:


I think the data speaks for itself. I would also add that the S&P 500 (SPX) has had only one down year since 2002, and that was 2008, but looking at the last table in the entry you would never know that the SPX was down 38% that year.  Why was the SPX only down 5% from 2007 to 2009, plain and simple, a trillion in crisis monetary policy that was used to prevent the collapse of our financial system as we know it.

So when you ask yourself how backward looking a revised 1.4% Q4 2015 GDP print is, think about the fact that in Q4 2008, TARP was just put in place, ZIRP became a thing, and the yield on the ten year Treasury had just been cut in half from 4% to 2% in a matter of months, just above where it is now.

So collapsing corporate profits, and weak GDP at this stage of the game, with an extended period without a recession might not be as backward looking as you think. And considering the table above that stocks always go down from the start of a recession it’s worth remembering that the SPX over the last 18 months is basically unchanged. Some could argue that we’re consolidating for a move higher.  But I think we are experiencing a rolling top, with a series of lower highs and for the first time since the bull marker started in early 2009, the first lower low in the SPX.

SPX 2 year chart from Bloomberg
SPX 2 year chart from Bloomberg

So what do you do with this opinion? I’ll just repeat what I have been saying for at least a year, it appears to be a sub-optimal spot to commit new cash to U.S. stocks. The volatility earlier in the year was not likely the flush that made it safe to get back in the pool.  Ignoring all else, from a technical standpoint, a failure below 2070/2100-ish makes a re-test of the long term uptrend nearly a certainty near 2000, and then the double bottom low from Oct 2014/ Feb 2016 is very much in play, and an air-pocket below to 1600.  From there you are on your own, but that would be a 25% re-tracement (half the amount of the peak to trough draw down from March 2000 to Oct 2002 and from Nov 2007 to March 2009) from the all time highs made last May, and probably not a bad spot to start dollar cost averaging stocks.

SPX since 2007 from Bloomberg
SPX since 2007 from Bloomberg