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 25% 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 has been issuing a warning the last 3 months and has just now dipped slightly below 50 (or danger zone). RPA doesn't usually get whipsawed like this, but these are truly unprecedented times (see this post on the huge increase of volatility lately).
There are still significant risks to investors; namely the continued uncertainty with how Europe will handle their debt crisis and the looming debt crisis here in the US. Despite those risks though there are some statistical improvements to the US economy. Unemployment has dropped a bit (perhaps helped by seasonal holiday employment), a record in consumer holiday spending, and an increase in consumer confidence.
Since we're so close to the 50 threshold I'd say any reversal in these metrics could push us right back into our danger zone. For now though, RPA is issuing a very tentative "green light" for investors.
Don't take this the wrong way and always be sure to never rely on just one measurement for investing decisions. A 49.6 is not good. It is good enough though to put the US economy just barely into the better half of relative economic conditions.
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,