As predicted from March, the algorithm correctly indicated that the market was going though a correction and that the likelihood of recession was low. On August 21st, the S&P 500 hit a new high. Although the Risk of Recession continues to move higher, market indicators show that momentum remains strong with the S&P 500 having a higher probability of making new highs rather than moving into a recession in the near term.
The Risk of Recession (RoR) indicator entered into “Critical” territory at the beginning of February for the first time since the Great Recession. This means the economy is highly overleveraged, but it does not mean a recession is necessarily imminent. The market direction will turn downward once a certain number of critical economic indicators start trending downwards. This includes the ISM index which is still above 50 indicating expansion in the manufacturing sector. As we have seen during the Internet bubble of 2000, the market continued to move upward for 3 years after reaching “Critical” status and did not turn downward until specific economic indicators began trending negative.
Volatility continues to hit the market and keep it in correction mode. Corrections on average can last for two to three months. Both Volatility and the Federal Funds Rate are having a significant negative impact on the market while Manufacturing continues to impact it positively. Unless there’s a sudden change in the Manufacturing trend, we will likely not see a recession in the near term. No need to panic...yet!
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