Market Overview

Opinion: Looking For The Recession? 5 Charts You Need To See


Kevin Cook is a Senior Stock Strategist for Zacks Investment Research.

Since the first stock market correction we saw this year in February through April, I've been following the research of a strategy team at investment bank Morgan Stanley headed by CIO Mike Wilson.

They were right to call a "growth peak" and to get concerned about a number of building economic and market headwinds, including a global slowdown and trade battle impacts. China's bear market in stocks now has many thinking thatthey are headed straight-away into a recession.

And as a result, several more investment banks and research teams are getting the idea.

In the video that accompanies this article, I highlight some charts from Goldman Sachs and Barclays of ISM/PMI data as a forward-looking indicator of economic trouble — which would spell equity market trouble.

Then I show some snapshots of a very accurate recession probability model from Ned Davis Research that is screaming "the recession is coming!"

The Ned Davis team has a quantitative model with over 92 percent accuracy going back to 1970. We won't know the proprietary mix of data inputs for their model, but we can certainly assume that this track record earns them the attention of many large investors who need to be able to predict a recession several quarters before it shows up in their portfolios.

Year-End Rally... Then What?

The most recent correction offered good buying opportunities in stocks, and with the midterm elections out of the way, it seems the runway is clear for takeoff into a Q4 rally from depressed price levels.

But stocks aren't exactly launching higher yet. So maybe the Mike Wilson team at Morgan Stanley still has this market pegged to go down to S&P 2,400, or lower, to really give institutional investors the latitude they need to feel comfortable allocating morefully back to stocks.

In late-October I said it was "code" to their hedge fund clients to wait for sub-S&P 2,500 before raising equity exposure again.

When I bought the correction lows last week, I didn't think they would get the chance at those price levels again this quarter.

But the first quarter of 2019 might be a different story. And large investors have the choice now to simply be timid bulls and wait for more ISM/PMI data, or they can not-so-timidly sell into the year-end rally.

Which might mean new highs and S&P 3,000 is off the table.

What say you about the recession watch and whether we see S&P 2,400 before 3,000?

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The preceding article is from one of our external contributors. It does not represent the opinion of Benzinga and has not been edited.

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