(By The Fundamental Analyst) Lakshman Achuthan has been consistent with his call that a recession in the US would start by mid-year. In this latest interview on Bloomberg (see below), Achuthan reiterates his call by claiming that the recession has arrived. If he is right, and the weight of evidence in my opinion says he is, that has some negative implications for the stock market. As of today, the S&P500 is just 3.4% off it's closing high of 1419 reached on April 2nd of this year. Typical losses associated with recessions vary widely but if we narrow it down to those historical instances that involve secular bear markets and above average valuations (using a method such as the Shiller 10 year trailing earnings P/E), annualized losses exceed over 40% on average.
As an example, take the chart below which shows at the extreme left the market peak of 2007 and a subsequent rally to within 3.7% of the prior peak. That rally actually occurred in the first month of the great recession, which at the time, the vast majority of market pundits dismissed as alarmist.
On April 2nd this year the market hit a new cycle high of 1419.04, a little over 3 months later and the market is within 3.4% of that April high. To be clear, I am not claiming that because the 2007 experience was similar that we will see a similar outcome. Of course the market could continue to rally higher, even make a new cycle high, a recession can be avoided. However, do you want to punt on that outcome? An outcome that runs contrary to historical experience. Severe market losses over the next 12-18 months, whilst certainly not inevitable are well within the realm of historical experience and investors should prepare themselves accordingly.
July 10th Bloomberg
