Is the Stock Market Signaling that We are Heading for a Recession?

Could it be that the stock market is signaling that we are heading for a recession? If it is, that also means there is a high probability we are in a bear market. What do the experts say?  As always, they see nothing wrong.  Then again, you have to factor in that most of these experts are working for big Wall Street firms that are never going to say anything negative about the markets or the economy.

I have been writing about evidence that we are heading for a recession and sharing some information that I write about in my bi-weekly client letter.  The ISM index might be telling us something.

The ISM Index

The ISM or the institute of Supply Management index is based on surveys of more than 300 manufacturing firms by the Institute of Supply Management. The ISM Manufacturing Index monitors employment, production inventories, new orders and supplier deliveries.  Each month the index announces a score for the prior month based on the health of the above variables.  The score can be from as low as 20 or as high as 75.

A number below 50 is a warning sign.  A number below 45 has predicted 11 of the last 13 recessions.  The last 4 months in a row have been under 50 with the latest (February 1) being 48.2.  Here is what the index looks like:

Are We Heading for a Recession 1

Notice the trajectory of the blue line. The index has fallen under 50 and is inching closer to that key 45 level.  You can see what happened during the financial crisis.  It fell below 35.  This latest reading is the lowest reading since March 09 (the bottom of the financial crisis)

Does it mean that we are heading for a recession?  Not necessarily.  However, it does issue a stern warning that the conditions are ripe for one.  This indicator along with many others is starting to sing the same song.  When a recession occurs, there are typically many indicators issuing warning signs all at once.

During recessions, the stock market falls and goes through a bear market before the economy is announced to officially be in a recession.  Could that be the case now?  Only time will tell.

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