Recession Probability Update - October 2012
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 nearly 15%. I began publishing the model in November of 2007.
Here’s the full history of RPA from inception:
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RPA (Recession Probability) rose in August and for the 3rd consecutive month it is hovering right around my "danger zone" of 50.
The economy is fragile. At the moment unemployment actually experienced an uptick (more people out of work) and consumer confidence is dropping. With GDP forecasts being as modest as they are, it wouldn't take much to move the US into a recession.
Oddly, despite the economic data the stock market has mostly surged this year. I would suspect much of this is due to the highly anticipated QE3 (which was recently announced). Fortunately the warning signs from RPA have only started recently, so using this tool would still have kept stock investors confidently invested for the most part.
That said, it's all about the here and now. And right now RPA is especially cautious. Even with further easing of money supply by the Fed the simple facts remain: If people don't have jobs they aren't making money. If people aren't confident (most of them) are not spending money. These things make it tough for an economy to grow, which is the primary reasons RPA is where it's at.
While I always advocate for more conservative, balanced investing approaches - with RPA hovering around 50, now is a reasonable time to be a touch more conservative than normal.