The Sensitive Sectors

"The most volatile part of the American economy has slowed significantly in the last nine months, providing a warning of both recession and lower stock prices"


So writes Floyd Norris in today’s NYT, A Slowdown in a Sensitive Sector May Bode Ill for Stocks, or Worse

Norris calls these three elements "the sensitive sector" and noted
they have, in the past, provided an early warning of recession and
lower stock prices:

"Over time, a good indicator of
both the economy and the stock market has been the relative performance
of the [these sectors versus the broader] economy over nine-month
periods. Most of the time, the sensitive sector does better. But when
that sector turns in poorer performance after a sustained period of
outperformance, it is a warning. And that is what has happened. Over
the nine months through June, the sensitive sector grew at an annual
rate of 2.1 percent, while the rest grew at a rate of 3.7 percent.

The graphic below accompanied his article: It is a depiction of growth in three sectors that can be considered
amongst the most sensitive to economic changes and to interest rates:
consumer purchases of durable goods, residential construction spending,
and business investment in equipment.

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Click for larger graphic

20060805_charts_graphic

Graphic courtesy of NYT

The first question any skeptic should ask is, how reliable a tell is this under-performance been in the past?

The indiciator is bvetter at foreshadowing a slowdown rather than an outright recession, where its record has been mixed:  This is the ninth reversal since 1954. There was no
early recession after reversals in 1955, 1964, 1978 or 1987. Recessions did follow after reversals in 1959, 1969, 1973 and
2000. In all eight of the cases, they did foreshadow a substantial slowing of the overall economy.

But the most significant tell applies to Stock prices:

"Moreover, anyone who got out of the stock market when a reversal happened seldom regretted it. There were some gains, but they were generally small. And selling at the time of the reversals would have gotten investors out before the major bear market of 1974-75, the 1987 stock market crash and the worst part of the stock market decline from 2000 to 2002. Over all, the average performance of the Standard & Poor’s 500-stock index in the 12 months after a reversal is a negative 5.7 percent."

That’s a signal worth paying attention to . . .

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Source:
A Slowdown in a Sensitive Sector May Bode Ill for Stocks, or Worse
FLOYD NORRIS
NYTimes,  August 5, 2006
http://www.nytimes.com/2006/08/05/business/05charts.html

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