7 Signs a Recession is Near
Although plenty of market strategists and economists say recession fears are overblown, John Hussman, the well-regarded manager of Hussman Funds, says the double dip is near, if not already here.
A recent survey of economists put the risk of another recession at just 25 percent. Plenty of brand-name strategists, including Jeffrey Kleintop of LPL Financial and Liz Ann Sonders at Charles Schwab (SCHW), say we're suffering from a recession in confidence more than a recession in the economy.
But Hussman warned investors Monday that all the well-meaning advice counts for nothing in the face of historical facts -- and the facts say recession is a certainty. As Hussman writes (emphasis in the original):
There are certainly a great number of opinions about the prospect of recession, but the evidence we observe at present has 100 percent sensitivity (these conditions have always been observed during or just prior to each U.S. recession) and 100 percent specificity (the only time we observe the full set of these conditions is during or just prior to U.S. recessions).In that vein, Hussman identifies seven major warning signs that a recession is either imminent or already upon us:
- A widening of credit spreads on corporate debt versus six months prior
- The S&P 500 below its level of six months prior
- The Treasury yield curve flatter than 2.5 percent (10-year yield minus 3-month yield)
- Year-over-year GDP growth below 2 percent
- ISM Purchasing Managers Index below 54
- Year-over-year growth in total non-farm payrolls below 1 percent
- Plunging consumer confidence
True, that's some scary stuff, and the fund manager is hardly alone in his bearish views. David Rosenberg, chief economist and strategist at Gluskin Sheff, says the data scream recession, but then he's been gloomy for years, even as the market nearly doubled from its 2009 low. Legendary investor Jeremy Grantham, chief investment strategist at GMO, puts the fair value of the S&P 500 at just 950. That's not much of a surprise, however, since he's been bearish far more often than bullish on U.S. equities for almost two decades.
The doomsayers may prove to be correct, but that doesn't mean long-term investors should abandon their strategies or -- more important -- lose their heads. As my colleague Allan Roth says, consistency is a critical key to successful investing.
"If one can't resist the impulse to make changes based on fear, greed, the always different economy, or the stock market du jour, then lower returns are virtually guaranteed," Roth says.
Remember that the economy has been flashing all sorts of ominous and yet conflicting warning signs lately. And no one has a crystal ball. A properly allocated portfolio (attuned to an honest assessment of your risk tolerance), realistic goals and long horizons are your best friends, whether we double dip or not.
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