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Michael Belkin

Michael Belkin

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Published by: caitlynharvey on Oct 11, 2012
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BELKIN REPORT belkin@attglobal.net 
©
2012 Belkin Limited All Rights Reserved 
Oct 10, 2012 
Bear Markets and the Business Cycle - a 110 Year View 
tock prices go down in recessions.
Although that is an obvious pattern in market history -- business school textbooks and mediatalking heads seem oblivious of it. The assumption that Fed-engineered rate cuts and credit expansions make stock prices go up isdeeply ingrained in market psychology. But the historical pattern is: Corporate earnings slumps in recessions make stock prices plummet.In the period around the last two business cycle contractions (2001 and 2008-09), S&P500 reported earnings (annual sum) declined 54%(2001, five quarters) and 92% (2009, seven quarters). The S&P500 index declined -49% from its March 2000 peak to its October 2002 lowand it declined -57% from its October 2007 peak to its March 2009 low. The peak and trough dates for business cycles, corporate earningsand the S&P500 index do not perfectly coincide.For the purposes of this report and table we use the Dow Jones Industrial Index (DJIA), because it has the best historical data going back110 years (to 1902 in our table). The National Bureau of Economic Research (NBER) defines US business cycle expansion and recessionturning points. Their data extends back 160 years www.nber.org/cycles.html.
 
We’ll focus on the past 110 years (22 cycles).
This is the stock market/recession pattern: 
The DJIA typically peaks several months before the official start of a business cyclecontraction - while the economy still looks OK (average -2.6 months before recession). Then the DJIA slumps (an average -30.6%),bottoming out in the deep, dark depths of the recession - before any economic recovery is evident. Then a new, extended rally starts (anaverage 3.9 months before the next economic expansion begins). That has been the pattern in virtually every business cycle contractionsince 1902 (see table). Percentage DJIA declines have ranged from -6% (ending 1945) to -89% (ending 1933). Please note that the peak(and trough) in the DJIA and economic cycle do not exactly coincide. That is probably why the pattern is not more widely understood.
The Belkin model forecast suggests that the US economy will soon tip over into an official recession.
 
That is based on the modelforecast for S&P500 earnings, industrial production, durable goods orders, retail sales and employment. Europe is already in a recessionand Chinese growth is slowing abruptly. Global economic weakness should infect the US through the international exposure of UScorporations (the tech sector has the highest international revenue exposure of about 55%).Business cycle dates are not officially announced until many months after economic turning points. So real-time economic forecasts thataccurately anticipate NBER cycle dates are critical. The NBER should eventually proclaim the start of a recession (months or years after ithas already started, way too late for investment decisions). The current business cycle expansion is now 40 months old, vs. the averageexpansion of 45 months (1902-now). That average is skewed by the last three artificially prolonged business cycles of 73, 120 and 92months. Pre-1990, the average expansion lasted 37 months.Many global stock indexes hit a tentative peak on Sep 14th, 2012. The DJIA went a little higher to 13610.15 last Friday (Oct 5, 2012).Assuming that the DJIA is at (or near) a market top - and applying that -30.6% average bear market decline during a recession - yields aballpark downside DJIA bear market target of 9,445. Higher-beta tech-heavy indexes (Nasdaq) probably have greater downside risk.We recommend that investors study the following table carefully and apply the lessons it reveals to the unfolding global economic downturnand stock index peak. The oldest lesson in the book is:
Sell all your stocks when the news is good right before a recession, go short, cover those short positions in the deepest depths of a recession and buy stocks again when no one wants to touch them and the news is terrible.
RECESSION RECESSION LENGTH LENGTH DJIA PEAK DATE OF DJIA PEAK DJIA LOW DATE OF % BEAR DJIA LOWSTART END RECESSION PREVIOUS BEFORE PEAK IN MONTHS DURING LOW MARKET IN MONTHS(MONTHS) EXPANSION(MONTHS)RECESSION BEFORERECESSIONRECESSION DECLINE BEFORE NEXTEXPANSIONOCT 1902 AUG 1904 23 21 67.77 09-Sep-02 -1 42.15 09-Nov-03 -37.8% -9JUN 1907 JUN 1908 13 33 96.37 07-Jan-07 -5 53 15-Nov-07 -45.0% -7FEB 1910 JAN 1912 24 19 100.53 19-Nov-09 -2 72.94 25-Sep-11 -27.4% -3FEB 1913 DEC 1914 23 12 94.15 30-Sep-12 -4 53.17 24-Dec-14 -43.5% 0SEP 1918 MAR 1919 7 44 89.07 18-Oct-18 1 79.15 08-Feb-19 -11.1% -1FEB 1920 JUL 1921 18 10 119.62 03-Nov-19 -3 63.9 24-Aug-21 -46.6% 1JUN 1923 JUL 1924 14 22 105.38 20-Mar-23 -2 85.76 27-Oct-23 -18.6% -8NOV 1926 NOV 1927 13 27 166.64 14-Aug-26 -3 145.66 19-Oct-26 -12.6% -12SEP 1929 MAR 1933 43 21 381.17 03-Sep-29 0 41.22 08-Jul-32 -89.2% -8JUN 1937 JUN 1938 13 50 194.4 10-Mar-37 -3 98.95 31-Mar-38 -49.1% -2MAR 1945 OCT 1945 8 80 161.5 06-Mar-45 0 152.27 26-Mar-45 -5.7% -6DEC 1948 OCT 1949 11 37 190.19 23-Oct-48 -1 161.6 13-Jun-49 -15.0% -4AUG 1953 MAY 1954 10 45 293.78 05-Jan-53 -7 255.48 14-Sep-54 -13.0% 3SEP 1957 APR 1958 8 39 520.76 12-Jul-57 -2 419.78 22-Oct-57 -19.4% -5MAY 1960 FEB 1961 10 24 685.47 05-Jan-60 -4 566.05 25-Oct-60 -17.4% -3JAN 1970 NOV 1970 11 106 968.85 14-May-69 -8 631.16 26-May-70 -34.9% -5DEC 1973 MAR 1975 16 36 987.06 26-Oct-73 -1 577.6 06-Dec-74 -41.5% -3FEB 1980 JUL 1980 6 58 903.84 13-Feb-80 -5 759.13 21-Apr-80 -16.0% -2AUG 1981 NOV 1982 16 12 1024.05 27-Apr-81 -3 776.92 12-Aug-82 -24.1% -3AUG 1990 MAR 1991 8 92 2999.75 16-Jul-90 0 2365.09 11-Oct-90 -21.2% -5APR 2001 NOV 2001 8 120 11722.98 14-Jan-2000 -3 8235.81 21-Sep-2001 -29.7% -1DEC 2007 JUN 2009 18 73 14164.53 09-Oct-2007 -2 6547.05 09-Mar-2009 -53.8% -3AVERAGE 15 45 -2.6 -30.6% -3.9
 
Belkin Report Introduction
There have been five major inflection points for the S&P500 and globalmarkets over the past 12 years (risk on/risk off). The following pages providea look back at Belkin Reports surrounding those inflection points and showwhat the report and model were forecasting a priori (without the benefit offoresight). Check the dates on the top right corner of each page to keepperspective on where each report appeared in the market cycle and glanceback at the chart below for context. This brief, targeted intro does not cover allthe detailed sector, group, stock and asset class forecasts included in eachweekly report. It is simply a sample of the reports at the major inflection pointsover the past 12 years.
S&P500
Peak: March 2000Bottom: October 2002 (-49%)Peak: October 2007 (+102%)Bottom: March 2009 (-57%)Peak?: September 2012 (+117%) forecast peak
S&P500 2000-2012
PeakMar 2000Peak Oct 2007+102%Peak Sep 2012?+117%BottomOct 2002-49%BottomMar 2009-57%

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