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 economic 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 improved for the 3rd consecutive month and now stands at 43.21. For now, it looks like the move above 50 was short lived and more of a warning of a potential economic unraveling more than an actual unraveling. RPA doesn't usually get whipsawed like this, but these are truly unprecedented times (see this post on the huge increase of volatility lately).
The economic improvement was largely due to large increased in consumer confidence (as evidence by record spending during November and December), improved stock market performance, and small improvements in unemployment. Given how fragile the situation in Europe still is and the fact the US has done nothing to address our own debt problems I'd say there's still always the potential for economic decline in the next 6-18 months, but for now the model suggests the investing environment is healthy.
Since the "green light" issued in December the S&P 500 has now risen 7.6% - so despite the 3 month long warning, RPA is still proving its worth.
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,