The Two 'Recession Indicators' That Point to the Same Date

'Fan mail'... A lesson from the Christmas 2018 bottom... and 2019's rise... What's to come in 2020 and 2021?... The two 'recession indicators' that point to the same date... Central banks want 'easier' money... The remedy for uncertainty... Last call for tonight's live event...

I (C. Scott Garliss) still remember the 'fan mail'...

No one cares about the trade war. It won't impact the market.

The Fed doesn't matter. All it does is react.

One reader even wrote in with what I felt was a huge backhanded compliment...

He wanted to hear from other people – to counter-balance "perma-bulls" like me.

Yet another reader told me I must have been "high."

Why were people so kind as to take the time to tell me this?

It was late December 2018, and I said if the markets hadn't bottomed, then we were very close...

You may remember, it was Christmas week, and the major U.S. indexes had dropped more than 20% since the previous October...

Coming into that moment, as I wrote on December 27, 2018, in the Stansberry NewsWire, investors were anxious about the state of trade negotiations between the U.S. and China...

And they were worried that Federal Reserve Chairman Jerome Powell's desire to continue raising interest rates in preparation for the next crisis was coming at a horrible time...

People I know were fearful that these two factors were going to choke off U.S. stock market growth.

The financial crisis of 2008-09 was still fresh in everyone's minds. Investors were fearful the market drop and the worst December stock market performance since the Great Depression were harbingers of more bad things to come.

But I was looking at indicators that told me that likely wouldn't be the case...

The presidents of the U.S. and China sat down at a Group of 20 ("G20") summit of political and central bank leaders in Argentina earlier that December to discuss reopening trade negotiations.

And, coming out of the meeting, the White House immediately said the two sides had agreed to restart face-to-face meetings in early 2019. The U.S. said the deadline for a deal was March 1...

China kept silent on that part at first, stoking worries that the details may have gotten out earlier than it wanted... But once the Chinese confirmed the renewed dialogue in late December, the markets began to believe.

And at the same time, the Fed was rethinking its policy direction. Back on October 3, 2018, Powell said interest rate policy was "a long way" from neutral (the rate at which it neither helps nor hurts the economy) and that more rate hikes were coming.

From that moment to when the market bottomed on Christmas Eve 2019, the S&P 500 Index lost 19.63%.

Not long after, on January 4, 2019, Powell said the central bank would be "patient" with interest rate policy going forward, and it was "listening very carefully" to the market.

My process told me the market's mood was improving...

During my 20-plus years working on Wall Street, my specialty had become dealing with hedge-fund clients... and not the easy ones.

Be it a curse or a blessing, I had developed a knack for improving relationships where there had been a "falling out" of sorts or those who had historically refused to do business with the firm where I was working.

While I thought I only did what everyone should do, clients appreciated it. I was always willing to go the extra mile in finding things beyond the obvious that helped them.

I was constantly trying to monitor indicators and signals that told me market direction was about to change. Oftentimes, swings in sentiment drive these changes...

By following signals and indicators that measure investor sentiment, it helps give you a sense of what's going to happen before it happens...

And there was a third clue that told me the environment was about to change...

Market volume – the number of shares being traded at a given time – is an important gauge of investor activity. It can be measured on a stock, an index, or an entire market...

When investors are actively trading something, volume is high. When they're not, volume is low.

And when they're really active, volume is huge. That's exactly what I saw in late 2018.

The average daily exchange volume in the U.S. that year was 7.25 billion shares per day. But in late December, that number surged. From December 17 to 21, it averaged 11.4 billion shares per day.

On the last full trading day before Christmas, volume was almost 15.2 billion shares (more than double the daily average for the year). On the half day of Christmas Eve it hit 5.95 billion. That's as much as a normal full day.

Coupled with the direction the market was going, the heavy trading volume and experience told me the sellers had thrown in the towel and were done... Anyone who wanted to get out was out.

And the market could now rally...

Investors who stayed involved then have made great returns...

One of the early lessons you learn on Wall Street is that the market tends to do whatever hurts the most people the most. Many people have a difficult time understanding that concept.

Warren Buffett said it in a nicer, more widely accepted way... "You want to be fearful when people are greedy and greedy when people are fearful."

In other words, it pays to go against the herd.

The sell-off at the end of 2018 and subsequent rally over the course of 2019 were prime examples of this adage at work...

At the end of December 2018, a lot of investors had finally had enough and thrown in the towel. Until that point, growth-oriented names like technology stocks had done very well.

The technology-heavy Nasdaq Composite Index had risen 14.2% (total return) from the beginning of 2018 through October 3. By the end of 2018, the same index had lost 3.9%.

Now, the opposite was about to happen to the upside... Investors were fearful of being invested in risk assets like stocks. The trade war and the Fed had become unpredictable. No one was certain of the outcome.

Instead, they were investing in safety assets like bonds.

The market was about to teach these folks another painful lesson... The S&P 500 Index rallied close to 30%, the Nasdaq Composite jumped 35%, and the Dow Jones Industrial Average added 22% over the course of 2019.

Today, the themes haven't changed a whole lot...

The Fed and other large central banks have increased easy money policies. The trade dialogue between the U.S. and China has improved so much they're signing a trade deal.

And important economic data show investors still remain cautious toward risky assets...

According to the Investment Company Institute, roughly $155.5 billion worth of assets came out of domestic equity funds last year.

Throughout 2019 and at the beginning of 2020, I remain positive on my market outlook.

Yet I can tell you I'm not permanently biased in one direction...

Nowadays, I aim to use my experience dealing with Wall Street money managers and impart that wisdom to subscribers.

Having been involved with mutual funds that managed more than $1 trillion and hedge funds that actively manage over $13 billion, I know how they think and what they're watching.

My livelihood depended on highlighting the items that would most affect their investments, in addition to giving them ideas that would make them money.

I can't say that every time was a success – who can? – but I can say that I was right many more times than I was wrong.

The relationships I developed were so profound, I still keep in regular touch with many of my former clients and co-workers.

What intrigues me most about the market right now is the intent of central banks to throw money at the problem...

The global and U.S. economies have their problems...

During the financial crisis, central banks came up with new ways to improve global liquidity, the available supply of credit and money. Not only did they lower interest rates, but they conducted rounds of huge asset purchases.

This helped to ensure that the global financial system stayed solvent. It improved the balance sheets of major financial institutions. In turn, they began to lend once more. It allowed people to borrow, businesses to spend, and the economy to rebound.

But the central banks aren't done...

The two major global central banks, the Fed and the European Central Bank, have recently asked their governors to suggest new ways to support economic growth.

Both institutions have said they're conducting "internal policy reviews." That's central bank-speak for "We're finding new forms of stimulus."

The last time this happened, the Fed delivered Quantitative Easing ("QE") and everyone else followed suit.

Expect something similar to happen now.

Here's what I'll be watching in particular...

In the past couple of years, there have been two important indicators telling us when the next U.S. recession might be coming.

My team follows them closely in the Stansberry NewsWire...

1) The yield-curve inversion

The last seven times the 2-year/10-year Treasury yield curve inverted, a recession has followed.

Since 1965, the average number of months before a market peak is 18.5 and the average number of months before a recession is 19. The 2-10 yield curve inverted in August 2019...

This suggests a recession could hit around March 2021.

2) Peak manufacturing data

In 1950, the Institute for Supply Management ("ISM") began compiling its manufacturing index – which measures new orders, production, employment, deliveries, and inventories in U.S. businesses.

Since then, the average amount of time from the index's peak to recession is 31.5 months, and the cycle may have peaked in the summer of 2018...

This also tells us a recession is likely around March 2021.

If that's right, it would give us about 15 more months before a recession hits the U.S. economy.

The science is never going to be exact. To say events will follow the exact same pattern and are easily predictable is crazy talk.

But still, we can use our judgment and our knowledge of the way things have played out in the past to inform our view of the future... And by doing this, it gives us a time frame and reference point for the road ahead.

Because if there's one thing that equity markets have a tendency to do, it's follow cycles.

It's interesting to me that these two pieces of data line up so closely. I don't believe these types of things are coincidences.

And it bolsters the case that we're looking at a recession happening around the spring of 2021.

Now, I know 'recession' is a scary word...

And talk of it spooks individual investors...

But let me be clear: I'm not saying the recession is going to be severe. In fact, right now, I expect it to be shallow.

But I'm not averse to changing my outlook, and I'm looking for patterns to give us an idea of severity and duration. It's pretty clear though from the Treasury yields and ISM data indicators about when it's going to hit.

And money managers are likely to set up for a recession six to eight months out...

So what's an investor to do?

You don't want to be on the wrong side of the equation when these money managers start selling...

But as I said earlier, with the Fed and central banks around the world in easing mode, markets are headed higher.

Unless your full-time job is to follow stocks and the market, that would seem like quite a bit of random data to find and make sense of.

But the good news is... you don't have to pick one side or the other, or try to time the market perfectly...

Let us take the guesswork out of the market for you...

As I said, we know it's nearly impossible for most individual investors to keep tabs on all the data, opinions, and news out there about the markets... even the information and analysis that comes from Stansberry Research alone.

In fact, one of the biggest complaints we hear from subscribers is, "You guys give me great research. But what do I do with all of it?"

Well, we have a solution – and it's part of what Porter, Steve, and Doc are planning to talk about tonight during our special live event. By now, you've probably seen the notices about this completely free event...

But here's a final reminder...

In roughly two hours, at 8 p.m. Eastern time tonight, our leading gurus will share their outlooks on the markets in 2020... like what's next for Steve's "Melt Up" thesis... what they think will happen with gold in the next year... and what a "bulletproof" portfolio looks like.

And that's just the first part of taking the guesswork out of the market for you...

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Click here to register for this special live event right now to make sure you don't miss it.

New 52-week highs (as of 1/13/20): AllianceBernstein (AB), Alibaba (BABA), Booz Allen Hamilton (BAH), Becton Dickinson (BDX), Bristol-Myers Squibb (BMY), Blackstone (BX), WisdomTree Emerging Markets High Dividend Fund (DEM), Electronic Arts (EA), New Oriental Education & Technology (EDU), Western Asset Emerging Markets Debt Fund (EMD), Equinox Gold (EQX), Facebook (FB), Fidelity Select Medical Technology and Devices Portfolio (FSMEX), Alphabet (GOOGL), Hannon Armstrong Sustainable Infrastructure Capital (HASI), Invesco Value Municipal Income Trust (IIM), Intuitive Surgical (ISRG), JD.com (JD), KraneShares Bosera MSCI China A Share Fund (KBA), Coca-Cola (KO), KraneShares CSI China Internet Fund (KWEB), Leagold Mining (LMCNF), Lockheed Martin (LMT), Lonza (LZAGY), Macquarie Infrastructure (MIC), Microsoft (MSFT), Norilsk Nickel (NILSY), NetEase (NTES), Nvidia (NVDA), Novo Nordisk (NVO), Invesco High Yield Equity Dividend Achievers Fund (PEY), PNC – Series P (PNC-PP), ResMed (RMD), ProShares Ultra Technology Fund (ROM), Southern Copper (SCCO), Splunk (SPLK), ProShares Ultra S&P 500 Fund (SSO), TAL Education (TAL), The Trade Desk (TTD), ProShares Ultra Financials Fund (UYG), Vanguard S&P 500 Fund (VOO), and Aqua America (WTR).

A quiet mailbag today. Do you have any "fan mail" about today's Digest? As always, send your comments and questions to feedback@stansberryresearch.com. And last call... Be sure to tune in to Porter, Steve, and Doc's special live event at 8 p.m. Eastern tonight.

Regards,

C. Scott Garliss
Baltimore, Maryland
January 14, 2020