The National Bureau of Economic Research (NBER) — a panel of economists entrusted with the responsibility to officially declare the beginning and end of recessions — declared the end of this recession.
But wait, amidst the sound of popping champagne corks, the snore of complacency and a cheer leading media, you can hear the economy’s distress signals.
The Good News
But who likes to hear about gloom and doom? Let’s focus on the good news. As per NBER, the longest recession the country has endured since World War II officially ended in June 2009 (see chart below).
During this recession, the economy has lost over 7 million jobs while the major market indexes — a la Dow Jones, S&P 500, Nasdaq and Russell 2000 — lost well over 50% of their value.
By declaring that the recession ended 14 months ago, NBER takes advantage of the much-coveted privilege of evaluating the economy in hindsight, as it did in December 2008 when it declared that the recession had started 12 month earlier.
Investors don’t have the luxury of placing trades based on hindsight and need to rely on forward looking data, not the rear view mirror.
Based purely on forward-looking indicators, the ETF Profit Strategy Newsletter predicted the biggest counter-trend rally since the October all-time highs on March 2, 2009 and recommended buying long and leveraged long ETFs, such as the Financial Select Sector SPDR (NYSE: XLF), Technology Select Sector SPDR (NYSE: XLK), ProShares Ultra S&P 500 (NYSE: SSO), ProShares Ultra Financials (NYSE: UYG) and many others. Are forward-looking indicators now in line with NBER?
The Bad News
On what does the NBER base its decisions? To make its determination, the NBER looks at figures that make up the nation’s gross domestic product, incomes, employment, and industrial activity.
Gross Domestic Product
Obviously, recent downward revisions to the GDP did not prevent NBER from its assessment that the recession had ended. The chart below shows recent revisions to GDP.
Telling the 15 million unemployed Americans that the recession has ended is like telling a homeless person that real estate prices (NYSE: IYR) are about to pick up. It’s ironic at best and cruel at worst.
Unemployment
The chart below shows the real percentage of unemployed Americans expressed by the U-6 unemployment data, published by the Bureau of Labor Statistics. With unemployment near an all-time high, can the recession really be over?
Consumer Sentiment
It is said that consumer spending makes up about two thirds to three quarters of the economy. What causes consumer spending? Money flow and confidence in future growth are often the catalysts.
Judging by the unemployment numbers, money flow is limited. This no doubt has had an effect on consumer confidence. The chart below shows the Consumer Confidence Index. If the recession is over, why is confidence near an all-time low?
Friday’s release of the University of Michigan’s Confidence Index was another blow against the economy. Based on this report, Americans planning to buy a home have fallen to a five-month low. Also, Americans planning to buy a car have dropped to the lowest level since December 2008, and 20% of Americans incomes are at risk of deflating.
Not only is the lack of spending power a practical threat to any economy, it is also a statistical threat to future GDP numbers.
A piece of statistical news that fits into the picture of falling consumer confidence is that the nation’s poverty rate jumped to 14.3% (Data source: U.S. Census Bureau). Poverty in the U.S. is defined by a family of four living on less than $21,954 a year. Currently, 43.6 million Americans fall into this category.
But perhaps this doesn’t make a difference, as the government is counting on the faithful flock of economists who don’t see their own demise and the few thousand “Wall Streeters” who cashed in on multi-billion-dollar bonuses to lift the economy.
The Silver Lining
Even though the NBER declared this recession over, it doesn’t preclude the occurrence of another recession. According to NBER, if the economy starts shrinking again, it could mark the onset of a much-feared but unexpected double-dip recession. As the first chart shows, this happened in the early 1980s.
No Double Dip
To Wall Street’s cheerleaders, the worst-case scenario is that the economy is stuck between a rock and a hard place as illustrated by this Bloomberg headline: “Escaping double dip still means no relief for jobless.”
As for investors, they seem not to care much. Monday saw U.S. stocks rally by 1.5%. International stocks and emerging markets were up 1.5% to 1.7%. Even European stocks were up, although the European Central Bank had to intervene to stabilize the Irish bond markets on Friday. In other words, the ECB had to prevent another Greece-style default.
In fact, does not the emergence of yet another European country’s default remind us of the February-April 2010 rally? This rally occurred on ultra-low volume and against a backdrop of bad news. It then stopped all of a sudden for seemingly no specific reason.
On April 16, the ETF Profit Strategy Newsletter warned: “The pieces are in place for a major decline. We are simply waiting for the proverbial domino to fall over and set off a chain reaction.”
The situation is similar right now. Even though stocks have broken out of the 1,040-to-1,130 trading range, they have done so on low volume and increased investor optimism. Within the past three weeks, the percentage of bullish investors tracked by AAII has soared by 30.15% to the highest level in over a year.
This doesn’t mean that stocks can’t inch up a bit further, just as they did earlier in April, but a look at all pieces of the puzzle doesn’t paint the picture of a new bull market.
The October issue of the ETF Profit Strategy Newsletter evaluates the bullish and bearish potential of the market with a unique approach, along with corresponding target levels and profit strategies.
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