Recently, a friend of mine told me about The Schannep Recession Indicator. Prior to this conversation, I had never heard about this economic barometer. While I am an avid reader, I missed Jack Schannep's 2008 book Dow Theory for the 21st Century. Personally, I remain convinced that the stock market is the best recession indicator. Nonetheless, as one who manages money for others, it is my fiduciary duty to always be looking for an edge.
With that in mind, I took a look at Mr. Schannep's website. His indicator uses the unemployment rate and the three-month moving average of that rate.
But before we examine Mr. Schannep's indicator, a brief explanation is needed for the uninitiated. The National Bureau of Economic Research has become the unofficial arbiter of when a recession officially starts and stops in the United States. The NBER is not a government entity. They are a non-profit, non-partisan economic think tank. They were founded in 1920 and, somewhere along the way, became the de facto experts on when a recession happened.
In the chart below, the gray bars represent those periods of recession so declared by the National Bureau of Economic Research. The key, however, is that the NBER has never declared a recession was starting. They have - so far - always pointed back in time to mark the start and stop of our nation's economic slump.
Obviously, declaring that a recession started months ago is not that helpful.
As a result, money managers, economists, business leaders, etc. are always looking for ways to foresee recessions.
The yield curve is one such prognosticator. We've discussed the yield curve ad nauseam in many of our YouTube videos. Hopefully, you've seen some of those videos and recall that I have repeatedly stated that just because the yield curve has a perfect track record of forecasting recessions, it does not mean that it will maintain such perfection. Likewise, given the perfect track record, we should certainly be aware of when the yield curve inverts.
That said, let's now look at The Schannep Recession Indicator.
On the chart below, the blue line in the top pane represents the civilian unemployment rate in the United States. The red line is the three-month moving average. The bottom pane is The Schannep Recession Indicator. Specifically, when the green line moves above the dashed horizontal line, it is signaling that the economy is in the early stages of a recession.
A close examination of the chart reveals that The Schannep Recession Indicator has just crossed the dashed signal line. Note further that every time this indicator turns above this black dashed line, a recession is in the early stages (reference the gray bars). As a result, while the nation historically waited for the NBER to declare a recession, The Schannep Recession Indicator pointed it out in real time.
Given that this indicator just crossed the signal line, and given its perfect track record, it does suggest (not guarantee) that a recession is either under way or very close at hand. However, let me conclude with two critical points, one for clients and one for non-clients.
For clients, as you already know, we actively manage your portfolio. We do not make investment decisions based on predictions and prognostications. We let price be our guide. If a stock, a stock index, etc. is rising it does not matter what these indicators are predicting. It might mean that we tighten up our stops. But, if price is going up, price is going up. Likewise, if none of these recession indicators are warning us, but price is going down, price is going down. We let price be our guide and we manage each model according to the investment management rules that govern that model. For our discretionary models, we manage our stats - keeping our eyes on our average win, our average loss and our win-loss ratio.
For non-clients, if someone manages your investment portfolio, make sure you understand their investment management process. If you are not confident that they have a definable process for investment decision making, then seek a second opinion. If you are self-managing your portfolio, make sure you have a clear process for your own investment decision making.
Naturally, if you have any questions and/or want a second opinion, click the blue button in the top right of the page to schedule a call.
P.S. Mr Schannep's book is now on my reading list.
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