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Mark Hulbert
June 22, 2010, 12:01 a.m. EDT · Recommend (4) · Post:
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A U.K. budget more of choice than necessity
By Mark Hulbert , MarketWatch
ANNANDALE, Va. (MarketWatch) -- "A double dip recession is all but certain."
That's what a growing number of investment advisers I monitor are saying -- which in turn makes me suspicious. Contrarian analysis teaches me to be skeptical of any claim of certainty in the investment arena, especially if and when more and more advisers begin repeating it.
So for this column I decided to take a critical look at the evidence that supposedly guarantees that the economy is about to embark on another leg down.
The piece of data that seems to be advanced most in support of this prediction is the Economic Cycle Research Institute's Weekly Leading Indicator -- or ECRI WLI for short. The advisers I monitor are falling over themselves in praising this indicator, with one calling it "the most prescient statistical guide to the health of the U.S. economy."
Another wrote that the ECRI WLI has "an almost 'holy allegiance.'"
Wow. If comments like those aren't enough to get one's contrarian juices flowing, then nothing will.
What has so exercised the advisers about the ECRI WLI is not its level but its growth rate. That's because the WLI itself, at 122.5 currently, remains relatively high -- though down from its 134.7 all-time high set on April 30, still 16% above its bear market low set in March 2009.
But the growth rate is most definitely coming down, and is currently rated minus 5.7 by ECRI.
One analyst I monitor wrote that a negative growth rate has been a reliable predictor of impending recession -- getting it right for all but two recessions over the last four decades. In addition, the analyst continued, a recession would become virtually certain if the growth rate were to drop to minus 10% -- something he thinks is likely to come to pass any week now.
The analyst continues: "There is an indisputable fact that when this indicator reaches minus 10% there has been a 100% correlation to a developing new recession. Call this a 'Guaranteed 2010 Double Dip.'"
This for sure doesn't paint a pretty picture for the economy's prospects.
The problem with these conclusions, however, is that they are based on very few data points. During the time that ECRI has been producing its WLI, there have been just seven recessions -- as judged by the National Bureau of Economic Research, the unofficial arbiter of when recessions begin and end in this country.
It's difficult, if not impossible, to draw confident statistical conclusions based on a sample this small, no matter how impressive the correlations otherwise appear.
But how impressive is the ECRI WLI in predicting a recession? You be the judge. The accompanying table lists the seven NBER-defined recessions over the last four decades, along with when the ECRI WLI's growth rate fell to at least minus 10%.
Notice that in the case of two of the seven recessions, the ECRI WLI growth rate never fell to minus 10%, either before or during the recession itself. In two more cases, it didn't do so until after the recession was already half over -- and in one of those cases, far closer to the end of the recession than the beginning. Only in three of the seven cases did a minus 10% growth rate for the ECRI WLI actually succeed in being a leading indicator.
Let me hasten to add that this recitation of the facts is not intended as a criticism of the ECRI WLI itself. Instead, it is intended as a criticism of how some advisers use the indicator. In contrast to them, the ECRI is very careful to stress that no one indicator should be used to predict a recession.
As fellow columnist Jon Markman pointed out in a recent column, quoting the head of the ECRI: The recent drop in the WLI growth rate means that economic "growth is about to slow noticeably -- not collapse." ( Read Markman's June 10 column. )
With regard to whether the slowdown in growth will translate into a recession, Markman quotes ECRI's head as saying that "the answer is not knowable yet and won't be known for a few months because, while the downturn so far is pronounced, it is not yet persistent."
None of this guarantees that the economy won't soon slip into another recession, of course. It may very well. The slowdown in the growth rate of the ECRI WLI definitely bears watching.
My point instead is the contrarian advice to be skeptical of any emerging consensus, since -- to the extent it is widely held -- investors begin to act on it unthinkingly. And that in turn creates opportunities for those investors who question that consensus.
Mark Hulbert is the founder of Hulbert Financial Digest in Annandale, Va. He has been tracking the advice of more than 160 financial newsletters since 1980.
Mark Hulbert is editor of the Hulbert Financial Digest, which since 1980 has been tracking the performance of hundreds of investment advisors. The HFD became a service of MarketWatch in April 2002. In addition to being a Senior Columnist for MarketWatch, Hulbert writes a monthly column for Barron's.com and a column on investment strategies for the Journal of the American Association of Individual Investors. A frequent guest on television and radio shows, you may have seen Hulbert on CNBC, Wall Street Week, or ABC's World News This Morning. Most recently, Dow Jones and MarketWatch launched a new weekly newsletter based on Hulbert's research, entitled Hulbert on Markets: What's Working Now.
The big question around Chancellor George Osborne's first budget is a simple one: is it one out of necessity or choice?
57 min ago9:01 a.m. June 22, 2010 | Comments: 5
- EconomicAdvisor | 11:16 p.m. June 21, 2010
"Mark Hulbert: Is a double-dip recession certain? http://on.mktw.net/d0cCwB" 11:46 p.m. EDT, June 21, 2010 from MktwHulbert
"Mark Hulbert: Dow Theory sees bull market near death http://on.mktw.net/cP4KGm" 11:41 p.m. EDT, June 15, 2010 from MktwHulbert
"Mark Hulbert: Are midterm elections bad for stocks? http://on.mktw.net/9DTB7p" 1:08 a.m. EDT, June 15, 2010 from MktwHulbert
"Mark Hulbert: Buybacks tell a bullish story http://tinyurl.com/37m7j37" 7:53 p.m. EDT, June 11, 2010 from MktwHulbert
"Mark Hulbert: Contrarian look at stock sentiment http://on.mktw.net/aPXcJq" 11:14 p.m. EDT, June 8, 2010 from MktwHulbert
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