Hussman Investment Trust Recession Indicators and Economic Trends

The Hussman Investment Trust is known for its recession indicators, which aim to predict economic downturns. This is achieved through a combination of quantitative and qualitative analysis.

The trust's recession indicators include the "Peak Margin" indicator, which measures the ratio of corporate profits to GDP. This ratio has historically fallen before recessions.

A key aspect of the trust's approach is its focus on market internals, which involve analyzing the behavior of various market metrics. These metrics include the percentage of stocks above their 200-day moving averages, which has been a reliable indicator of market strength.

The trust's indicators are designed to provide a warning system for potential recessions, allowing investors to adjust their portfolios accordingly.

The yield curve inversion is a strong indicator of recession, as seen in the 2008 financial crisis when the 10-year Treasury yield fell below the 3-month Treasury yield.

The yield curve has inverted in the past 12 recessions since 1955, with an average lead time of 22 months.

The yield curve inversion is a warning sign that the economy is slowing down, and investors should be cautious.

The HICP inflation rate has consistently risen before each recession since 1980, with an average increase of 2.4% six months prior to the recession.

The HICP inflation rate has been steadily rising since 2020, reaching 3.2% in 2021.

The yield curve has been steadily flattening since 2020, with the 10-year Treasury yield falling below the 5-year Treasury yield.

The unemployment rate has consistently fallen before each recession since 1970, with an average decrease of 0.8% six months prior to the recession.

The US unemployment rate has been steadily falling since 2020, reaching 3.5% in 2021.

Economic data trends can be tricky to interpret, especially when it comes to predicting a recession. The Conference Board's Leading Economic Index (LEI) is a key indicator that has never experienced an uninterrupted decline prior to and during the early part of a traditional recession.

This index is made up of ten different components, including manufacturing activity and sentiment, stock and bond market activity, and consumer sentiment. As the economy moves toward recession, these components are bound to give some mixed signals on the way down.

The LEI has indeed declined sharply since 2021, but the pace of the decline is at similar levels to October of last year. The stock market has been a major ballast against the rate of change in the leading index continuing to move lower.

Economy data trends are rarely straight down, and that's a good thing to keep in mind as the economy enters recession. The reason is that the Conference Board's Leading Economic Index (LEI) has never experienced an uninterrupted decline prior to and during the early part of a traditional recession.

The LEI has ten indicators, and as the economy moves toward recession, these ten different components are bound to give some mixed signals on the way down. This has regularly happened in the past.

The rate of decline in the LEI is often influenced by the stock market. In recent months, the stock market has been the main ballast against the rate of change in the leading index continuing to move lower.

The world of economic data trends can be overwhelming, but let's break it down into something manageable. The Conference Board's Leading Economic Index (LEI) is a great place to start, as it compiles indicators on manufacturing activity, stock and bond market activity, consumer sentiment, and more.

The LEI has a fascinating pattern: it rarely declines in a straight line before a recession. This is because the index has ten different components, which can give mixed signals on the way down. In fact, the LEI has never experienced an uninterrupted decline prior to and during the early part of a traditional recession.

One of the most important components of the LEI is the stock market. The S&P 500 Index has been a ballast against the rate of change in the leading index continuing to move lower. However, if the downtrend in the S&P 500 continues, the LEI will lose the component that has been most supportive of it since last October.

Here are ten economic indicators to keep an eye on:

The yield curve is a reliable recession indicator, and it's worth paying attention to. Every time the 10-year Treasury yield has dipped below the 3-month yield since the 1960s, the economy has gone into recession. The spread is in its deepest inversion since the early 1980s.

Yield curve inversions like this typically happen when the Federal Reserve raises interest rates on the short-end above long-term yields. This can lead to a decrease in demand for long-end bonds, causing their yields to drop further.

The spread between the 3-month and 10-year Treasury yields is a key indicator of economic health. It's worth keeping an eye on, as it can signal potential recession.

The ultimate labor market recession indicator is a gauge compiled by fund manager John Hussman, which includes multiple indicators such as Sahm's and Kantrowitz's. It has recently hit the starting point of recessionary levels.

This indicator is a combination of several labor market metrics, making it a more conservative and reliable gauge. It's essential to monitor this indicator closely, as it can provide valuable insights into the health of the labor market.

Historically, stock market investors have been sensitive to rising jobless claims, which is an important indicator to watch. The chart below shows the correlation between jobless claims and the S&P 500 Index, highlighting the rare instances where investors have ignored a persistent rise in jobless claims.

The combination of jobless claims and market action gives an even stronger signal, suggesting that risk of recession is likely to grow if claims rise and stocks fall together. This relationship is an important one to monitor through the end of the year.

Here's a list of key job market indicators to watch:

Monitoring these indicators can provide valuable insights into the health of the labor market and help investors make informed decisions.

Manufacturing activity can be a gauge on consumer demand, but it makes up just over 10% of GDP, making it less reliable as a recession indicator on its own.

Hussman compiles data from Fed and ISM manufacturing surveys to track this indicator.

Manufacturing activity has been moving alongside the recessionary zone over the last year or so.

This suggests that consumer demand is a key factor to consider when evaluating the economy's health.

The yield curve inversion is a key indicator of a potential recession, as it suggests that investors expect interest rates to fall in the future. This can be a sign that the economy is slowing down.

According to the article, a yield curve inversion has occurred in 9 out of the last 12 recessions. This suggests that a yield curve inversion is a reliable indicator of a recession.

A recession is typically defined as a decline in GDP for two or more consecutive quarters. The article notes that the US has experienced 11 recessions since 1945, with an average duration of 10 months.

It's worth noting that the Hussman Investment Trust uses a variety of indicators to forecast recessions, including the yield curve inversion, the unemployment rate, and the stock market's price-to-earnings ratio.

Small R forecasts, like those from the National Bureau of Economic Research, can be misleading. The NBER's definition of a recession, which requires a significant decline in economic activity, can be tricky to apply in real-time.

The NBER's recession dating committee often takes months to declare a recession, and their definition can be subjective. This can lead to a false sense of security when economic indicators are only slightly negative.

The NBER's definition of a recession is not a hard and fast rule, but rather a guideline. The committee's decisions are based on a variety of factors, including GDP, income, employment, and sales.

This time feels different because the economy is facing a perfect storm of factors that have never been seen before. The pandemic has caused unprecedented disruptions to global supply chains, leading to shortages and price increases.

The rise of the gig economy has made it difficult to accurately measure unemployment rates, which can make it harder to predict when a recession might occur.

The current global debt levels are at an all-time high, with many countries struggling to pay off their debts. This has led to a significant increase in government borrowing costs.

The rapid growth of technology has led to increased productivity, but it has also led to job displacement, particularly in industries where automation is becoming more prevalent.

Many experts are warning that the current economic conditions are ripe for a recession, with some predicting that it could happen as early as 2023.

The Sahm Rule is a relatively new indicator that's gained significant attention since its creation by Claudia Sahm in 2019. It states that the US economy is in recession when the unemployment rate's 3-month moving average rises 0.5% from its lows over the previous year.

The Sahm Rule hit 0.53% in early August, but Sahm believes it's delivering a false positive. She thinks the US economy isn't in a contraction yet, although things are trending for the worse.

The Ponzi Economy is a warning sign that a recession is looming. A Ponzi scheme is a type of investment scam where returns are paid to existing investors from funds contributed by new investors, rather than from profit earned.

Ponzi schemes are unsustainable and eventually collapse, causing financial losses for all involved. In 2008, Bernard Madoff's Ponzi scheme was exposed, causing $65 billion in losses.

The housing bubble of 2007 was fueled by subprime mortgages, which are high-risk loans given to borrowers with poor credit history. These loans are often used to finance Ponzi schemes.

The collapse of the housing bubble led to a sharp decline in housing prices, causing widespread financial losses. The S&P/Case-Shiller Home Price Index measures the change in home prices in 20 major US cities.

In a recession, the stock market often experiences a downturn, making it a useful indicator. The Dow Jones Industrial Average is a widely followed stock market index that measures the performance of 30 large US companies.

The Sahm Rule is a recession indicator that's gained significant attention since its creation by Claudia Sahm in 2019. It's based on the unemployment rate's 3-month moving average rising 0.5% from its lows over the previous year. This rule hit 0.53% in early August, but Sahm herself believes it's delivering a false positive.

The Sahm Rule's threshold is a crucial aspect of its methodology. By increasing the recession threshold for each indicator, it makes the gauge more conservative and reliable. This is a deliberate choice to avoid false alarms.

The Sahm Rule has been consistent with prior recessions since 1960. This is a reassuring fact, but it also means that the rule is not foolproof. Its accuracy can be affected by various economic factors.

The Sahm Rule is often compared to the Kantrowitz Rule, which says that when the number of unemployed persons rises by at least 10% year-over-year, the economy is in recession. These two rules share a similar principle, but they have different thresholds.

The Three Horsemen of a Recession are a trio of indicators that signal a potential economic downturn.

High inflation rates can be a sign of a looming recession, as seen in the article section where inflation rates have exceeded 5% in some countries.

The yield curve, a graph showing interest rates, can also indicate a recession, as noted in the article section where a negative yield curve has been observed in some economies.

Declining consumer spending is another key indicator, as shown in the article section where a decline in retail sales has been recorded in several countries.

Market returns have been historically low, with the S&P 500 returning only 4.1% per annum over the past 10 years, compared to its long-term average of 7.7%.

The yield curve has been inverted, a sign of a potential recession, with the 10-year Treasury yield falling below the 3-month Treasury yield. This inversion has occurred in 8 out of the past 12 recessions.

The S&P 500 has been trading above its 200-day moving average, but the trend line has been flat for the past year, indicating a lack of momentum.

The leading economic indicators, such as the Conference Board's LEI, have been declining, indicating a potential recession. The LEI has been declining for 6 months, a sign of a recession.

The yield curve has been inverted for an extended period, with the 10-year Treasury yield falling below the 3-month Treasury yield for 6 months. This prolonged inversion has occurred in 4 out of the past 12 recessions.