Recession Probability (RPA) Update - February 2013
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 30%. I began publishing the model in November of 2007.
Here’s the full history of RPA from inception:
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After rising quite a bit in December, RPA (Recession Probability) has dropped markedly in January. As pointed out in the December update, last months numbers were forced up much more than normal due to the economic impact of Hurricane Sandy, so I fully expected things to normalize somewhat this month.
Having escaped a major blow by (at least for the short term) addressing the "Fiscal Cliff," the economy is now getting ready for the "Debt Ceiling." For the moment it appears negotiations for how that will be handled are most likely going to be put off until May. As such, the markets are humming along, oblivious to the long term consequences of continually kicking the debt can down the road. Investors are making money, taxes didn't go through the rough, so all seems well for now.
Of course, this won't last forever, but for the time being RPA is below 50. While not strong, it's not bad either.
Since RPA is a math based, mechanical, non-emotional measurement of economic strength - the model is telling us now is a good time to be balanced as an investor. Times could be better, but at least for the short term, there's no reason to be especially cautious. This could all change in the coming months - so be sure to keep on eye on this economic indicator as we get closer to May.
I hope all my clients and blog readers are enjoying a great start to the New Year. I'll be back online over the weekend with some stock market specific updates.