iM’s Business Cycle Index Warns A Looming Recession – Update 1/15/2023

The BCI at 262.0 is above last week’s level, raising the BCIp from 18.2 to 27.6 (see Figure 1, magenta curve). It warns that past performance suggests that a recession could be as early as 14 weeks away, but at least sooner. 28 weeks. (See Figure 2). BCIg, BCI’s 6-month smoothed annual growth rate is 1.3, down from last week’s 1.5 (see blue curve in Figure 1). When the BCIg crosses zero, historical performance indicates recession with an average lead of 12 weeks.

Description of iM’s Business Cycle Index

In 2013, we created a business cycle index from the following underlying economic data:

1. 10-Year Government Bond Yield (Daily)
2. 3-month government bond yield (daily)
3. S&P500 (Daily)
4. Ongoing Claims Seasonally Adjusted (Weekly)
5. All Employees: Private Company Total (Monthly)
6. Newly built lots (monthly)
7. New detached house sales (monthly)

The complete dataset has been available on FRED since 1967. The “real-time” aspect was taken into account when combining the components of the index. That is, data were included in the index only on the date of publication, not on the dates indicated in the series.

The BCI itself does not provide a recession signal, but after further manipulation of the series two indicators are extracted that reliably signal a looming recession.

1. The 6-month smoothed annual growth rate of an economic series is a well-established method for extracting indicators from the series. Use this method to get the BCIg (growth). where BCIg is the calculated growth rate plus 6.0, and historical performance produces an average of 11 weeks leading recession signals when BCIg falls below zero.
2. We also find that the BCI clearly retreats from its cyclical pre-recession peaks. This allowed the extraction of an alternative indicator, BCIp (deviation from previous peak of BCI). Historical performance shows that BCIp values ​​fell by more than 25 an average of 20 weeks before a recession.
3. In the 2014 article iM’s BCIw: A Weeks to Recession Indicator, the BCIp (BCI Deviation from Previous Peak) indicator was compared to the BCIw (BCIw) derived based on the NBER defined from the previous BCIp track. week). recession.

Two indicators, BCIg and BCIp, can be used as sell signals for ETFs that track stock markets and equities in general, such as SPY, IWV and VTI.

For each recession, Table 1 records the S&P 500’s pre-recession peak, BCIg signal day value, and subsequent inter-recession trough low. From these we calculate the losses avoided by closing the market on the day of the BCIg signal.

Table 1: SPY loss avoidance when exiting on BCIg Recession Warning.
Note	1	2	3	Four	Five	6	7	8
recession	P.Eek	S.signal	T.rough	(PT)/P	(ST)/S	(PT)	(ST)	(ST)/(PT)
January 70	106.16	93.24	69.29	36.1%	25.7%	36.87	23.95	65.0%
December 1973	120.24	103.36	62.28	48.2%	39.7%	57.96	41.08	70.9%
February 2080	115.2	100.3	98.22	17.1%	2.1%	16.98	2.08	12.2%
August 81	140.52	128.64	102.42	27.1%	20.5%	38.1	26.22	68.8%
August 90	368.95	332.92	295.46	19.9%	11.3%	73.49	37.46	51.0%
April 2001	1520.77	1326.82	965.8	36.8%	27.2%	554.97	361.02	65.1%
January 08	1565.15	1508.44	676.53	56.8%	55.2%	888.62	831.91	93.6%
average of all recessions				34.6%	25.9%			60.9%
Column notes: S&P 500 peaks in the year before recession S&P 500 iM-BClg Signal Date The S&P 500 bottom during a recession %-peak to trough loss %- avoid loss from signal to trough Absolute loss from peak to trough Avoid absolute loss from signal to trough Percentage of peak-to-trough losses avoided

click to enlarge

As shown in the last column of Table 2, following the BCIg signal from the recession indicators, we avoided an average of about 61% of the total market decline from the pre-recession peak to the inter-recession trough. I could have done it. You can see it in column 5. By closing the market on the signal day, we could have avoided an average loss of about 26%. Had we known the market peak, we could have avoided the 35% average drop as shown in column 4.

Figure 3 plots the history of BCI, BCIg, and LOG (S&P 500) since July 1967. Figure 4 plots BCIp’s history, his 56-year history. Show in a timely manner. The plot shows the weeks leading up to the recession.