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BEING STREET SMART 

by Sy Harding

A Recession - To Be or Not to Be? December 7, 2007.  

Whereas a year ago it was referred to only as the ‘R’ word and given little thought, talk of a possible recession is everywhere these days, especially on Main Street .

A Reuters/Zogby poll in early November revealed that 40% of adults polled believe a recession is on the way. A poll by Bloomberg/ L.A. Times last week revealed that 71% expect a recession within a year.

However, the majority of professional economists still expect only a significant slowdown, but not an actual recession.

Economists at the Federal Reserve recently lowered previous economic forecasts, citing the ongoing problems in the housing market, the credit crunch, and high oil and gasoline prices as the main reasons for the downgrade. The Fed now expects the U.S. economy is growing only 1.5% in the current quarter, and will average only 1.8% - 2.5% in 2008. But it does not expect the economy to slow all the way into a recession (negative growth).

A poll by the Wall Street Journal in November showed economists on average believe there is only a 30% chance of a recession in coming months. Former Federal Reserve chairman Alan Greenspan puts the odds of a recession at “less than 50-50”.

But are economists able to warn in advance of recessions anyway?

Probably not. Because they wait for proof in the data. Economic data is old by the time conditions change and the data is collected, compiled, and reported. The result is that recessions are usually already underway, and in some cases have already come and gone, before the available data convinces economists that a recession 'is coming'.

A number of years ago I wrote a piece in my newsletter making fun of how in the spring and summer of 1991, economists finally became convinced a recession was going to take place. Later data showed that the recession had actually begun in July, 1990 and ended in March, 1991. It had already come and gone. A recent article in The Economist provides more examples. It begins, "In 1929, after the 1929 crash, the Harvard Economic Society reassured its subscribers that: 'A severe depression is outside the range of probability.' [Of course, later data showed the Great Depression of the 1930s, the worst ever, had begun]. In a survey in March, 2001, 95% of U.S. economists said there would not be a recession, even though [later data showed] the 2001 recession had already begun."

So, I wonder what we should make of the current debate among economists. Are they right in expecting only a slowdown and not a recession, or simply behind the curve?

Meanwhile, our Seasonal Timing Strategy, which I’ve mentioned to you before, is simply based on a calendar and the market momentum-reversal indicator MACD. Ignoring surrounding conditions, it triggered its entry signal for the favorable season on November 28, just two days after the market’s correction low on November 26.

The market’s favorable season is created by extra chunks of money that flow automatically into the market toward year end, from such sources as annual distributions from mutual funds, yearly contributions by employers to their employees’ profit-sharing and 401K plans, etc.

Often the upside reversal that begins the favorable season takes place in October, not from those inflows of extra money, which haven’t begun yet, but when institutions and money managers begin buying early in anticipation of the favorable season rally.

Other times, like this year, no one was buying early. There were just too many economic negatives weighing on the market.  In fact, the activity was on the sell side, sending the market into a correction in October and November that had the Dow down 10% from its September peak.

It seems like there is still not a lot of money moving in from the sidelines, like it is just the usual extra chunks of money that flow in automatically near year end that has created the rally so far. I say that because trading volume has remained light, only around 1.4 billion shares trading daily on the NYSE even as the Dow has gained 7% since its low just 9 trading days ago.

That has me going back to look at other years when the favorable season began late in the year, indicating institutional buyers were not anticipating much of a favorable season rally. The latest entry signal of the last 50 years was on December 10, 1973. And the favorable season rally was anemic. The Dow gained only 8% from its low in November, 1973, to the end of the year, and made no further progress from there through the following spring. Another late entry took place in 1989. The Dow gained only 6.2% from its correction low to the end of that year, and also made no further progress through the following spring, even having several short-term pullbacks after the end of the year.

So although following the Seasonal Timing Strategy has more than doubled the performance of the S&P 500 so far this year, and over the last nine years, (and over the last 50 years when back-tested), this may turn out to be one of its more nervous and less stellar favorable seasons. 

Sy Harding is President of Asset Management Research Corp., and publisher of the financial website www.StreetSmartReport.com, and the free blog www.SyHardingblog.com. He also authored the timely 1999 book Riding the Bear - How to Prosper in the Coming Bear Market, and 2007's Beating the Market the Easy Way - Seasonal Strategies that Double the Market!

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