Recession Probability - November 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 27%. 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) was above 50 last month, which turned out to be a good warning thus far. As of today the S&P 500 has dropped about 2% in October and anytime RPA is above 50 the model suggests moving out of stocks. That said, improved real estate data and a nice jump in consumer confidence dropped RPA below 45 this month. This is still close to my "danger zone" of 50, but an improvement nonetheless.
The economy is still very fragile though. GDP is forecast at 2% for 2012 and many blue chip companies are reporting less than exciting earnings. I'd say the holiday shopping season is critically important to improving earnings this year, and if it disappoints could drive the US economy into a recession as early as next year.
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.