What Happens to the Stock Market if the U.S. Follows the World into Recession?
History is rather unkind to blind faith in central banks, just as the rising U.S. dollar and stagnant sales are being very unkind to corporate profits.
The quasi-religious faith that central banks can push stock markets ever higher regardless of real-world realities may well be tested in 2015-2016. The global economy spiraling into recession (a.k.a. a period of slow growth–heh) raises two questions:
1. Can the U.S. economy decouple from the global economy, i.e. keep expanding production, sales, income and payrolls while the rest of the global economy falters?
2. What happens to the U.S. stock market if/when the U.S. follows the rest of the world into recession?
My colleague Dave P. at Market Daily Briefinghas posted information on a recession detector based on the work of economists Chauvet and Piger.
In essence, the model considers four data series: real personal income, nonfarm payrolls, industrial production and real final sales (as a percentage of change). If all four are rising, the probability of recession is low.
If all four roll over and decline, the probability of recession (generally defined as a decline in gross domestic product for two consecutive quarters) approaches 100%.
This makes intuitive sense: if personal income, industrial production, real final sales and payrolls are all declining, how can GDP continue expanding?
For context, let’s start with a chart I published earlier this week of new manufacturing orders–which look unambiguously recessionary:
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