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 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.
Current Comment: With year-over-year growth in real consumer spending holding at 3% or better (note: left scale) for most of the past three years, S&P 500 profits have also held up, increasing (right scale) at 10% or more year-over-year. This results from the consumer-spending/industrial-production/capital-spending cause-and-effect chain shown in Figures 7-3,7-5, and 7-7. Clearly, the corporate-profit and, therefore, stock-market outlook hinge importantly on continued growth in real consumer spending.
