Each month I calculate the strength of the US economy using a math based model I call RPA (Recession Probability Analytics). When the number rises above 50 it means the US economy is in the bottom 50% of all historical conditions relative to it history. While far from perfect, the model has had an uncanny ability to correlate (negatively) with stock market returns. In other words, when the model moves above 50 the S&P 500 has fallen over 20% and when it is below 50 the S&P 500 has risen over 15%. I began publishing the model in November of 2007.
Here's the full history of RPA from inception:
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RPA was more than off in October, with the model warning of economic weakness while the S&P 500 rose more than 10% (despite an end of month sell off). With RPA rising for the 5th consecutive month it does make me wonder if the market rally can continue. This is especially concerning to me since virtually every long term measure of market strength is still waning despite the strong month of October.
Despite the market and economic optimists out there (many who are especially optimistic After big rallies in stocks) the fact is the economy is still weak and getting weaker. The measurements that are causing RPA to rise continue to be job and consumer confidence related. The story, per RPA, is that when people aren't working and are not confident in the economy their spending usually drops. In an economy that is 2/3 driven by consumer spending it makes it tough for companies to profit. Earnings for public companies has been relatively resilient though - but I'd suggest a lot of that is due to aggressive cost cutting and not so much sustainable business growth.
If you have any questions or comments about RPA - feel free to use the comment feature on my blog. If you're getting this notice via email you can of course just hit the reply button and your email will come to me directly.
Thanks and have a great week,