Myth Busting Those Pesky Recession Fears in Four Simple Charts

Submitted by Wall St. Daily as part of our contributors program

Fear is a nasty emotion to overcome for investors.

It often forces us to stay out of the market too long - or bail too early. Either way, we end up missing out on profits.

However, the rewards for mastering our fears are significant. Hence Warren Buffett's famous adage to "be fearful when others are greedy, and greedy when others are fearful."

Why bring this up now?

Well, fears that the U.S. economy is destined to enter another recession in 2013 have recently re-emerged.

In fact, the latest IBD/TIPP Economic Optimism Index reveals that "Americans across the board think that the economic outlook is grim," according to Raghavan Mayur, President of TIPP.

More specifically, "nearly 60% believe that the economy is in a recession," says Mayur.

What a crock!

And in honor of Myth-Busting Mondays , I'm going to prove it with four simple charts. Because the last thing you should do is buy into this recession mentality, as well.

It'll cost you.

The Problem With Perception…

I'll concede that it's tempting and perfectly logical to be afraid that another recession is right around the corner. After all, the economic recovery since 2009 has been anything but robust.

Case in point: In 10 out of the 14 quarters since the recession ended, the annual equivalent growth rate failed to top 2.5%.

So, at best, the recovery can be characterized as fragile. However, that doesn't mean we're teetering on the cusp of another recession like many investors fear.

As I mentioned on Friday, though, "perception seldom matches reality."

That's why we need to be ever vigilant to make investment decisions based on hard data (reality), instead of perception (emotions).

In this case, the data speaks loud and clear…

~Exhibit A: Bespoke's Economic Indicator Diffusion Index

Each week, Bespoke Investment Group measures the pace at which economic indicators are coming in ahead of (or below) expectations to create its Diffusion Index.

A positive reading suggests that economic conditions are strengthening. If the reading is negative, it suggests that economic conditions are deteriorating.

And guess what? The latest reading was clearly in positive territory.

According to Bespoke, "The improvement that we have seen in the Diffusion Index over the last two weeks is the strongest upward move over a two-week period since August."

In other words, economists' expectations have been way too pessimistic. And in the here and now, the U.S. economy is actually picking up momentum.

Sorry, those are not the conditions that trigger a recession.

~Exhibit B: David Rosenberg's Recession Indicator

Gluskin Sheff economist, David Rosenberg, puts tremendous stock in an indicator that measures the rate of business spending.

Specifically, it tracks the year-over-year change in the three-month moving average for non-defense capital goods orders, excluding aircraft and parts (also known as "core capex" spending).

I know… what the heck does that mean?

Don't get bogged down in the description. Here's all you need to know…

When this indicator is negative, it means businesses aren't spending their cash, which places a huge drag on the economy. That's exactly what happened in October leading up to the Fiscal Cliff debacle.

However, when the indicator is positive, it shows that businesses are spending. And that's a boon for the economy.

In other words, a recession isn't imminent when Rosenberg's indicator is in positive territory.

And guess what? It recently flipped back into positive territory.

So again, in the here and now, any recession fears are completely unfounded.

Now, I'll concede that these indicators are subject to short-term volatility, as they rely on data points that are updated frequently.

Consequently, they might not be convincing enough for you to ignore those pesky fears about another recession. Fair enough.

If you're in that boat, hang tight until tomorrow.

I'll share two more indicators that aren't subject to significant short-term swings. They also have a virtually unblemished track record of predicting recessions.

I promise they'll put any fears you have about an imminent recession to rest - once and for all. So stay calm and be sure to tune into tomorrow's column…

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

More Related Articles

Info icon

This data feed is not available at this time.

Sign up for Smart Investing to get the latest news, strategies and tips to help you invest smarter.