How worried should you be about a recession?

Preface: Explaining our market timing models
We maintain several market timing models, each with differing time horizons. The “Ultimate Market Timing Model” is a long-term market timing model based on the research outlined in our post, Building the ultimate market timing model. This model tends to generate only a handful of signals each decade.

The Trend Model is an asset allocation model which applies trend following principles based on the inputs of global stock and commodity price. This model has a shorter time horizon and tends to turn over about 4-6 times a year. In essence, it seeks to answer the question, “Is the trend in the global economy expansion (bullish) or contraction (bearish)?”

My inner trader uses a trading model, which is a blend of price momentum (is the Trend Model becoming more bullish, or bearish?) and overbought/oversold extremes (don’t buy if the trend is overbought, and vice versa). Subscribers receive real-time alerts of model changes, and a hypothetical trading record of the those email alerts are updated weekly here. The hypothetical trading record of the trading model of the real-time alerts that began in March 2016 is shown below.

The latest signals of each model are as follows:

• Ultimate market timing model: Buy equities*
• Trend Model signal: Bearish*
• Trading model: Bullish*

* The performance chart and model readings have been delayed by a week out of respect to our paying subscribers.

Update schedule: I generally update model readings on my site on weekends and tweet mid-week observations at @humblestudent. Subscribers receive real-time alerts of trading model changes, and a hypothetical trading record of the those email alerts is shown here.

Recession fears are rising
The whiff of recession is in the air, and anxiety levels are rising. Analysis from Google Trends reveals that searches for the terms “recession” and “yield curve” have spiked.

Tariff Man is getting worried. At the nadir of last week’s stock market decline, Trump tweeted, “The Fake News Media is doing everything they can to crash the economy because they think that will be bad for me and my re-election”.

The New York Times reported Trump is convinced that there is a conspiracy to distort economic data and exaggerate the prospect of a recession,

President Trump, confronting perhaps the most ominous economic signs of his time in office, has unleashed what is by now a familiar response: lashing out at what he believes is a conspiracy of forces arrayed against him.

He has insisted that his own handpicked Federal Reserve chair, Jerome H. Powell, is intentionally acting against him. He has said other countries, including allies, are working to hurt American economic interests. And he has accused the news media of trying to create a recession…

Mr. Trump has repeated the claims in private discussions with aides and allies, insisting that his critics are trying to take away what he sees as his calling card for re-election. Mr. Trump has been agitated in discussions of the economy, and by the news media’s reporting of warnings of a possible recession. He has said forces that do not want him to win have been overstating the damage his trade war has caused, according to people who have spoken with him. And several aides agree with him that the news media is overplaying the economic fears, adding to his feeling of being justified, people close to the president said.

How serious are the recession risks? What should and shouldn’t equity investors be worried about? We examine some details.

The full post can be found here.