Recession Probability (RPA) – September 2014

Tuesday, August 26, 2014 | Leave a comment

Each month I calculate the strength of the US economy using a math based model I call RPA (Recession Probability Analytics). When the number rises above 50 it means the US economy is in the bottom 50% of all economic conditions relative to its history.

While far from perfect, the model has had an uncanny ability to correlate (negatively) with stock market returns. In other words, since I started publishing RPA the S&P 500 is only up about 25% (but very volatile); however, when RPA has signaled less than 50 (the “green light” so to speak), the S&P 500 has risen over 80% (and much less volatile).  I began publishing the model live in November of 2007.

Here’s the full history of RPA from inception:

Month/YearRPAS&P 500S&P ReturnGrowth of $100,000 if exiting S&P 500 for month after RPA moves above 50
Oct-0754.31549.381.5%$101,482.23
Nov-0744.91481.14-4.4%$101,482.23
Dec-0765.61468.36-0.9%$100,606.60
Jan-0877.51378.55-6.1%$100,606.60
Feb-0883.41330.63-3.5%$100,606.60
Mar-0889.41322.7-0.6%$100,606.60
Apr-0892.41385.594.8%$100,606.60
May-0883.41400.381.1%$100,606.60
Jun-08761280-8.6%$100,606.60
Jul-0864.11267.38-1.0%$100,606.60
Aug-08601282.831.2%$100,606.60
Sep-0852.51166.36-9.1%$100,606.60
Oct-0864.5968.75-16.9%$100,606.60
Nov-0871.5896.24-7.5%$100,606.60
Dec-0886.4903.250.8%$100,606.60
Jan-0989.4825.88-8.6%$100,606.60
Feb-0974.5735.09-11.0%$100,606.60
Mar-0971.5797.878.5%$100,606.60
Apr-0967.1872.819.4%$100,606.60
May-0961.1919.145.3%$100,606.60
Jun-0956.6919.320.0%$100,606.60
Jul-0953.5987.487.4%$100,606.60
Aug-0952.61020.623.4%$100,606.60
Sep-0943.21057.083.6%$100,606.60
Oct-0939.71036.19-2.0%$98,618.41
Nov-0938.81095.635.7%$104,275.56
Dec-0940.11115.11.8%$106,128.59
Jan-1042.51073.87-3.7%$102,204.57
Feb-1044.71104.492.9%$105,118.80
Mar-1045.21169.435.9%$111,299.40
Apr-1042.21186.691.5%$112,942.11
May-1043.91089.41-8.2%$103,683.57
Jun-1041.31030.71-5.4%$98,096.86
Jul-1040.21101.66.9%$104,843.74
Aug-1040.11049.33-4.7%$99,869.00
Sep-1039.81141.28.8%$108,612.64
Oct-1039.71183.263.7%$112,615.66
Nov-1040.71180.55-0.2%$112,357.74
Dec-1039.31257.646.5%$119,694.70
Jan-1140.21286.122.3%$122,405.26
Feb-1134.51327.223.2%$126,316.92
Mar-1128.31325.83-0.1%$126,184.62
Apr-1132.81363.612.8%$129,780.30
May-1131.31345.2-1.4%$128,028.15
Jun-1134.31320.64-1.8%$125,690.67
Jul-1138.71292.28-2.1%$122,991.53
Aug-1146.21218.89-5.7%$116,006.71
Sep-1161.091131.32-7.1%$115,942.94
Oct-1167.051253.3010.8%$115,942.94
Nov-1159.61246.96-0.51%$115,942.94
Dec-1149.61257.600.85%$115,942.94
Jan-1243.211312.414.4%$121,044.43
Feb-1238.741365.684.1%$126,007.25
Mar-1232.781408.473.1%$129,913.48
Apr-1237.251397.91-0.7%$129,004.09
May-1241.721313.32-6.1%$121,199.34
Jun-1247.681362.163.71%$125,706.53
Jul-1252.151379.721.29%$127,327.05
Aug-1249.171406.580.00%$127,327.05
Sep-1252.151440.672.42%$130,412.96
Oct-1244.701412.160.00%$130,412.96
Nov-1247.681416.180.28%$130,784.21
Dec-1245.131426.190.71%$131,708.63
Jan-1346.191498.115.04%$138,350.44
Feb-1343.211514.683.32%$142,952.77
Mar-1337.251569.193.53%$147,997.41
Apr-1340.231597.571.81%$150,676.16
May-1332.781630.742.1%$153,804.62
Jun-1329.801606.28-1.5%$151,497.66
Jul-1329.801685.734.9%$158,991.05
Aug-1323.841632.97-3.1%$154,014.95
Sep-1326.821681.553.0%$158,635.40
Oct-1329.871756.544.5%$165,773.99
Nov-1329.811805.812.8%$170,415.66
Dec-1329.831848.362.4%$174,505.64
Jan-1431.291782.59-3.5%$168,296.23
Feb-1434.271859.454.31%$175,552.67
Mar-1434.271872.340.01%$176,769.63
Apr-1429.81883.950.62%$177,865.74
May-1428.311923.572.1%$181,600.92
Jun-1425.31960.231.9%$185,051.34
Jul-1422.351930.67-1.5%$182,275.57
Aug-1417.882003.373.77%$189,139.22
Sep-1420.861972.29-1.55%$186,204.94
Oct-1419.372018.052.32%$190,525.17
Nov-1416.392067.562.45%$195,199.43
Dec-1417.882058.90-0.42%$194,381.84
Jan-1514.901994.99-3.10%$188,348.06
Feb-1520.862105.505.49% $198,686.96
Mar-1520.862067.89-1.74% $195,230.58
Apr-1522.352085.510.85% $196,894.10
May-1517.882107.391.05% $198,959.79
Jun-1511.922063.11-2.10% $194,779.32
Jul-1511.92TBDTBDTBD

What RPA is Saying This Month

Record Breaking!! (and shocking)

I’ve been reporting the true statistical rank of the US Economy now for nearly 7 years. The past 3 months have each set new records for the best ever “live” numbers reported. The August numbers came in at 17.88. This means on a scale of 1 to 100 (1 being the best) the US Economy would rank just better than 18.

This is great in some ways, but bewildering in others. There are still a lot of people that can’t seen to believe the market rally over the past few years is the real deal. I myself, have been a doubter more than once. But the numbers don’t lie – the economy is actually pretty strong right now, which has pretty well justified the big rally in stocks / real estate and other growth oriented investments.

The drivers for the economy as of late have been: Improving consumer confidence, increasing home values, and continuous improvement in labor markets.

Alas, as I’ve mentioned (many times) before, the stock market is still due for a correction. Stocks have gone up substantially the past year (and the last 5 years). A pullback from overbought conditions is perfectly normal and happens all the time.

It’s just that from an economic perspective, a pullback would be just that, and not necessarily the sign of a full blown recession. Each pull back we’ve had over the last year has been modest, with most just 4% to 8%. I fully expect we’ll get a real pullback eventually, which would be more like 10% to 15%. It may happen soon, or may not happen for a few more months (or longer). Either way, stay tuned to blog updates for warning signs.

Since RPA is a math based, mechanical, non-emotional measurement of economic strength – the model is telling us now is a good time to be balanced as an investor. Times are pretty good at the moment, but good times don’t last forever – so be sure to keep on eye on this economic indicator next month.

Cheers,

Jason Wenk

In Recession Probability RPA | | | |

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