Figure 8-4: Bear markets begin when growth in real consumer spending (PCE) peaks and begins to slow
The relationship between economic slowdowns (led by downtrends in year-over-year consumer spending) and bear markets (vertical yellow bars) is remarkably consistent, though not infallible, over many cycles. Most bear markets begin (see red circles) when the year-over-year rate of growth in consumer spending is peaking, and investor and general business optimism are at their highest! Considerable courage is required to reduce investments at such times.
This suggests that finding an effective discipline for forecasting downturns in (the rate of growth of) consumer spending is essential to reducing stock market exposure, against conventional wisdom, at these junctures. Most bear markets then proceed as (the rate of growth in) consumer spending continues to slow, and are largely over by the time recessions (black bars) are under way.
Conversely, most bear markets end (see blue circles) when consumer spending and S&P 500 profits are at, or even prior to, their worst year-over-year comparisons. In a mirror image of stock-market peaks, considerable courage is required to wade back into the stock market at such times!
Current Comment: Year-over-year changes in real consumer spending and corporate (S&P 500) profits in 2009 are likely to be the worst seen in five decades. However, this chart clearly shows that the coming year, maybe even the next six months, is likely the time to invest, in the face of a seemingly relentless economic downturn. The singular risk to this view would be some further major illiquidity or foreign-currency events leading to a depressionary spiral.
