ECRI's Recession Call from September should be updated tomorrow morning at 6:30 EST on Squawk Box. If anyone sees this please share.
Squawk Box Interview
Lakshman Achuthan will join Squawk Box at 6:10 AM (ET) to discuss the recession call that ECRI announced in September.
businesscycle.com
In 2001 and 2008 after an ECRI recession call the market rallied for a couple months up to the 10 month simple moving average and then rolled over.
seekingalpha.com
The Economic Cycle Research Institute announced September 30, that it is forecasting the U.S. Economy will enter a recession. The current call is out of consensus as most current economic indicators show some signs of growth, albeit muted compared with pre-2008. Recessions are typically observed several months after they actually begin due to the time lag in collecting economic data. However, the ECRI is making a forecast, not an observation, so if it is correct it could be months before a recession is officially recognized.
Time will tell if ECRI is vindicated. However, its track record in calling recessions is worth noting. In March 2008, and March 2001, it accurately forecasted recessions. As Jon Markman recently noted, these two predictions were followed by brief market rallies lasting about two months, before U.S. equity markets took significant losses.
Below is a monthly chart of the S&P 500 Index from early 1997 to the present.
As you can see, the timing of the recession forecast does not necessarily trigger an immediate sell-off. in fact, the 2001 and 2008 forecasts coincided with market rallies lasting about two months to the 10 month simple moving average, that were then followed by significant declines.
Our current market is following a similar trajectory - we have rallied strongly in October and the 10-month SMA is looming at 1284. The winter is typically a seasonally strong time period for equity markets, so this rally could continue until the end of the year. However, if we follow a similar path as 2001, and 2008, more pain lies ahead for equity investors.
One factor working against equity investors is the long-term valuation of equity markets that does not look especially cheap. One of my favorite tools for gauging long-term valuations is the P/E10 ratio, tracked by Doug Short. The current reading is 19.7, which puts us in the 74.7 percentile, with the 100 percentile being the "Tech Bubble" in the late 90s/early 2000s.
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