Scott and I have stated in some blogs and on our weekly webinars (highrockcapital.ca/private-client-division.html) that past US recessions all started with the Federal Reserve Board hiking up their overnight Fed Funds interest rate (the rate at which commercial banks lend to each other). Usually the recessionary result is due to the fact that the Fed hiked rates prematurely.
But the question is, how long after they started hiking Fed Funds, did a recession begin? What is the lead time?
Given we think this is exactly what is happening in the US right now (and now Canada too, and to an even great extent, given our deteriorating housing market), I thought I would look at what that lead time has been over the past few recessions.
As you can see below, the Average time (in months) from when the Fed first hiked Fed Funds to when a recession started is 29 months (beige line). In blue, you can see where we are today at 18 months from their Dec 2015 hike.
If we extrapolate the average, the US would hit a recession in July 2018 (11 months from now for a total of 29 months from Dec 2015).
If we use the shortest period (1999-2001), which was only 21 months, then the US could hit a recession by Nov 2017, which is only 3 months away.
You may ask, "what on earth is going to lead to a recession? Stocks are at all-time highs". How about the Fed and the faltering economic numbers that really matter?
Note the white line a "Hard Economic Data". Hard Data has been trailing off since late last year, although it has ticked up a bit the last two weeks of July. The yellow line is "Soft Economic Data" (like surveys etc) which climbed higher right thru till March but is now coming off as well. And the green line? ...the S&P 500. Interesting chart.
Just a couple of reasons why we are investing more cautiously right now.
Remember, at High Rock, we are managing our own capital the exact same as our clients and everything we do (for all) is based on risk management and protection of capital.
Tomorrow, in advance of Friday's monthly payroll data, I will try to post another interesting comparison on the same topic.