John Hussman's Latest: The Recognition Window

Over the course of the market cycle, one of the primary areas of risk for stocks (and conversely, one of the best periods for Treasury bonds) is typically the “recognition window” where economic activity begins to deviate from the upward trend that is priced into the market, and investors begin to recognize that an economic downturn is, in fact, likely. In my view, the instant relief provoked by the manufacturing PMI and the employment report was an overreaction to data that is still very early in that window. The typical lead times between deterioration in reliable measures such as the ECRI weekly leading index (and several of our own measures) and deterioration in “coincident” economic activity tend to be on the order of 13-26 weeks. For most economic indicators, we are not there yet. This is why I emphasized two weeks ago that “the much earlier deterioration in economic measures is not encouraging, but it also opens up the possibility that we may see some misleading ‘improvement’ in the data in the next few weeks before we get into the more typical window of deterioration.”

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