Recession Probability Update (RPA) - April 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, since I started publishing RPA the S&P 500 has fallen over 5%, but when RPA has signaled less than 50 (the "green light" so to speak), the S&P 500 has risen over 40%. I began publishing the model in November of 2007.
Here’s the full history of RPA from inception:
[table id=3 /]
For the third consecutive month RPA (Recession Probability) dropped in March, and pretty markedly this time around. Sequester came and went, without fireworks of any kind. The markets have remained resilient, hitting new all time highs yesterday for the S&P 500 (after the DJIA did so a few weeks prior).
On an interesting side note...
I started publishing RPA right about the same time as the last market high. Since then the market dropped (majorly), and has since rebounded back to those all time high levels. All together, this has taken a little over 5 years. RPA, on the other hand, signaled warnings throughout all of 2008 and parts of 2009, 2011, and 2012. Following these warnings would have allowed investors to avoid the bulk of the markets worst months, which is why the table above shows (hypothetically) growth of +43% compared to just buy-and-hold investing during the same time period.
Back to this months RPA reading...
Last month we saw lower initial unemployment claims, an increase in construction permits, and rises in total wealth (due to the stock market rising substantially) - all now improving for consecutive months. Unlike past months, however, when the above data improved but consumer confidence dropped, consumer confidence improved also.
While RPA has been cautious for the past year, it has mostly signaled a green light (meaning it was below 50 - which is the better half of all economic conditions).
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. Times are pretty good at the moment, but good times don't last forever - so be sure to keep on eye on this economic indicator next month.
While I know not everyone celebrates this, today is Good Friday, and Sunday is Easter. I hope you all find some time to enjoy your family and friends, and have a fantastic weekend. On top of better than average economic conditions, sports fans (especially those from Michigan like me) are also enjoying good times. Michigan and Michigan State in the sweet sixteen, the Masters golf tournament is right around the corner...hey, all seems right in the world for just a bit!