Faber: Global Economy in Recession

“It’s not a recession; it’s an economic slowdown.” – George Bush

Marc’s right; it’s a global recession. It’s somewhat unusual to have a U.S. recession in an election year, but it happened in 1960 and 1980. On the other hand, stocks usually rally before the recession ends. Is it happening now?

To examine this question, I did a quick study which might be of interest. Starting in 1948, I checked the Dow’s performance during the 6 months from Aug. 1 of the election year to Feb. 1 of the post-election year. There were 15 such cases, and 11 of the 15 six-month periods had gains. The average price gain was +4.58% for the 6-month period, or over 9% annually — better than the Dow’s average annual price gain over the whole period (reflecting the well-known positive tendency of election years).

In three of the four periods with losses, the Dow had risen by a double-digit percentage in the preceding year (from Aug. 1 of the pre-election year to Aug. 1 of the election year). The sole exception was the flat year of 1948, when the Dow had lost 1.45% in the preceding year, and went on to lose 0.41% more in the 6-month election period.

On the flip side, what happened when the Dow on Aug. 1 of the election year was down from a year ago? There were six such instances. Except for 1948 mentioned above, in the other five cases the Dow rose during the next 6 months. Its average 6-month gain (including the 1948 loss) was +6.40% — better than the previously-mentioned average gain of +4.58% for all 15 periods.

As of Aug. 1 this year, the Dow was down 13.86% from a year ago. The only other instance in which an election runup started with a double-digit loss from a year ago was 1988, when the comparison was to the pre-Crash Dow of Aug. 1987. In 1988, the Dow gained 9.75% in the next 6 months.

Fifteen data points is not enough for statistical significance. However, in a crude way, these results hint at some possible underlying principles:

1. The 6-month period bracketing the U.S. election has a better-than-average positive tendency.

2. Losses in the 6-month period usually followed gains in the previous year, indicating a possible overbought condition which undermined the seasonal tendency. On the other hand, entering the 6-month period with the Dow down from a year ago produced gains that were better than the average election-period gain.

3. In 2008, the Dow entered the 6-month election period down 13.86% on a year ago — the seventh such instance since 1948. If the pattern holds, the Dow should be higher on Feb. 1, 2009 than its level of 11379.89 at the beginning of this month.

Not investment advice — remember that the CNBC “bottom-calling curse” is upon us! What happens when the irresistable force of statistics collides head-on with the immovable object of wrong-way Media? STAY TUNED FOR THE SURPRISING ANSWER!

Do I need to buy a PC to watch this video with AUDIO?

C’mon Bloomberg!

Hmmm, global slowdown. How to fix that? I know raise taxes on the rich! /sarcasm

Using Dow data back to 1896, I extended the analysis described above to cover the 28 election years from 1896 to 2004. In the 6 months starting Aug. 1 of the election year and ending Feb. 1 of the following year, the Dow was up 20 of 28 times, for an average gain of +8.17% (+17.01% annualized).

The seasonal effect was even stronger for the 3 months before the election, from Aug. 1 to Nov. 1: the Dow was up 21 of 28 times, for an average gain of +4.92% (+21.18% annualized).

What about election years when the Dow was down on Aug. 1 from a year ago? It’s happened 11 times, not counting 2008. Afterward, the Dow rose 10 of 11 times in the next 3 months to Nov. 1, for an average gain of +6.27% (+27.54% annualized).

Twenty-eight data points is not enough for statistical inference (30 is the minimum), but it’s close. Do you discern a pattern here? Do you feel BEARISH, punk? Well, do you?

Is the host a friend of his? If not she came across as awfully rude. She didn’t call him Dr., which I would think is important to someone of his age and culture. And she was pretty flip.

Merrill Lynch economist David Rosenberg on NBR:

SUSIE GHARIB: With the credit crisis now a year old, Wall Street is assessing the state of the economy and we checked in with one of the nation’s most prominent economists. David Rosenberg, chief North American economist at Merrill Lynch was one of the first to forecast a recession for the U.S. This morning, I asked him to describe the health of the economy now.

DAVID ROSENBERG, CHIEF NORTH AMERICAN ECONOMIST, MERRILL LYNCH: The economy right now is in the middle of a recession that started off with housing, morphed in to credit and now it’s gone in to the consumer arena, which is 72 percent of GDP. So right now we’re in to a new chapter. It’s the consumer side of the equation. A recession started in January in my opinion, probably is not going to end until the mid part of next year.

GHARIB: In terms of interest rates, what can we expect from the Federal Reserve as the next move? Is it going to be a hike in rates or is it going to be a cut?

ROSENBERG: I think it’s going to be a cut. But even that’s up in the air right now. There surely not going to raise interest rates. To raise interest rates irrespective of inflation which is a totally backward looking indicator, to be raising interest rates in this very tentative and very fragile economic environment I think would be a huge policy mistake. So my sense of that, once credit developments become more positive, the Fed is probably going to cut interest rates and then I think we’ll see lower interest rates through most of 2009. But I think the Fed is basically for the next six months just on hold.

GHARIB: Are you saying that deflation is going to be the next concern? Tell us why?

ROSENBERG: I’m not sitting here saying that the CPI is going to go negative. But what I am saying is that the same factors that gave us the deflationary backdrop back in 2002, which is widening excess capacity in the labor market, widening excess capacity in the product market and weak commodity prices, alongside what’s happening in terms of asset deflation is going to be a fundamental backdrop next year. So one of the reasons why I think interest rates end up being a lot lower than they are today.

GHARIB: Tell us about the job market. When do you see businesses ramping up to hire again?

ROSENBERG: We can see housing bottom out and we have to see the credit situation improve. And then we’re going to start to see the hiring. And I expect that is going to be a 2010 story. I don’t think it’s going to be a 2009 story. If you are going to ask me do I think that we’re going to see an employment rate growing about 6 percent towards 7 percent in the next 12 months, I’d be braced for that.

GHARIB: Why do you see the unemployment rate going up to 6-7 percent?

ROSENBERG: Because I think companies are going to be forced to cut their payrolls more aggressively over the course of the next 12 months. In light of the fact that we’ve morphed from housing recession to a credit crunch to now the consumer, this is a very big deal. The U.S. consumer is 72 percent of GDP. So if the consumer starts to spend less, that has feedback impacts right through back into the credit market, back to the housing market.

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