Figure 8-4: Bear markets begin when growth in real consumer spending (PCE) peaks and begins to slow
Uptrends and downtrends in real-consumer-spending growth drive far greater swings in corporate profits, represented here by Y/Y growth in S&P 500 earnings per share (green line: note greater volatility of right-hand scale). The relationship between economic slowdowns (led by downtrends in Y/Y 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 Y/Y 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 Y/Y 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:This chart proved its worth yet again in the traumatic 2008-2009 downturn. The stock market bottomed in early 2009, even as corporate profit comparisons were still approaching their worst levels. This chart shows quite clearly that dire conditions present the greatest investing opportunities, and this helps provide the necessary courage for the opportunistic investor to venture into the market against what appear to be formidable odds. Note that, as always, economists’ designation in late 2008 that a “recession” was under way came far too late to avoid the devastating declines in equity prices in 2008. The current momentum in both real consumer spending and corporate profits suggest a favorable stock-market environment for most of 2010.
