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 is just barely up (but very volatile), but when RPA has signaled less than 50 (the "green light" so to speak), the S&P 500 has risen over 50% (and not too volatile at all). I began publishing the model in November of 2007.
Here’s the full history of RPA from inception:
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What RPA is Saying This Month
With the financial markets on cruise control, and economic data improving, RPA has been dropping like a rock (and that's a good thing). RPA is at its lowest levels in over a year, coming in at 32.78. Housing starts remain strong, interest rates low, stock markets up, and consumer confidence improving. RPA is not issuing any warnings of recession in the coming months at this time.
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). Now it's getting to levels where the likelihood of a recession in the near term or downright unlikely. It's not to say that one might not pop up near year end, or maybe early 2014, but the next few months look decidedly positive.
I should point out that this doesn't mean the stock market couldn't have a correction. Stocks have been going up an awful lot, awfully fast. It would be perfectly normal for a pull back. It's just that from an economic perspective, a pullback would be just that, and not necessarily the sign of a full blown recession.
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.