From Lu Wang, “There is an optimistic signal…” Bloomberg (January 18, 2023):
It’s as close to a certainty bet as the market can offer. When the S&P 500 falls by 20% or more, a recession is behind. But economists, who take the signal into bearish forecasts for 2023, should take a deeper look at last year’s slump before placing their bets all in.
…
new analyze Researchers at Banque de France and the University of Wisconsin-Madison have shown that treating the market as a whole is less effective in assessing its economic signals, in part because benchmarks such as the S&P 500 can be undervalued by overpriced companies or The impact of those companies that derive revenue from overseas. The performance of industrials and value stocks is a better predictor of future growth, according to research covering the period 1973-2021.
The paper in question is Chatelais, Stalla-Bourdillon, and Chinn, “Using Cross-Sector Stock Market Information to Forecast Real Activity,” International Journal of Money and Finance (March 2023)discuss here Visitor message. Factors based on disaggregated equity indices have better predictive power than 10-year to 3-month term spreads and composite equity indices.
Figure 2: Out-of-sample RMSE from different estimation models
notes: Out-of-sample RMSE for different models (factor model or univariate regression dependent on aggregated DY, lagged IP growth or term spread) are represented in the graph. The predictor variables are IP growth at 12, 18 and 24 months.
The article concluded:
Barclays Plc strategists, including Venu Krishna, keep a model that tracks stock leadership and business cycles and compares them over time in an attempt to understand the market’s assessment of economic conditions. Now, the conclusion is clear: there is no recession.
Unfortunately, our model predicts a 2.2% decline in industrial production as of July 2022, which contrasts with positive forecasts for term spreads and total dividend yields, which diverge somewhat from Barclays’ bullish conclusions. As of December, US IP is down 0.5 percentage points relative to June 2022.
