John P. Hussman¬†can be remarkably outspoken. He may even be one of the brightest minds in the investment management business, where several¬†hallmark Hussman¬†Funds serve as¬†admirable hedges against market¬†demise.¬†
With that said, Mr. Hussman’s recent commentary of 6/14/10 caused my skepticism to perk up.¬†In bold letters he wrote, “unless credit spreads, the S&P 500 or the yield curve reverse course, a further decline in the Purchasers Managers Index to 54 or below would be sufficient to confirm a double-dip recession.”
However, this¬†statement isn’t as¬†audacious as one might think. After all, if forward-anticipating mechanisms like the stock¬†market and the yield curve are deteriorating alongside declines in manufacturing, things would have to be pretty bad, wouldn’t they?
Rightly or wrongly,¬†Mr. Hussman has maintained an exceptionally dim view of the U.S. economy.¬†Even the expectation of the¬†ISM’s Purchasers Managers Index slipping below 54… simply because it declined in the previous month from a robust 60.4 to 59.7… seems particularly pessimistic.
More importantly, however, Mr. Hussman¬†offers¬†four criteria (PMI inclusive) which¬†collectively¬†predict recessions. And while I do not doubt that the criteria¬†forecast recessionary forces, I do not recognize a¬†collective capacity¬†to determine where market-based securities will go or when.
Markets themselves tend to be better at identifying where they may go next (vis-a-vis 200-Day MAs). So the question of double-dip, U-shaped, V-shaped, or¬†the Great Recession’s continuation¬†are of less¬†relevance to¬†successful¬†investing outcomes.
In fact, none of us should be¬†quick¬†to accept bearishness (or bullishness) at face value.¬†It follows that¬†I’m addressing¬†Hussman’s criteria concerning¬†falling stock prices and manufacturing uncertainty through 2 key ETFs: Rydex Equal Weight S&P 500 (RSP) and iShares DJ Transports (IYT).
Mr. Hussman maintains that when the S&P 500 is below its price from 6 months earlier, one of four coveted recessionary criteria have been met. On 6/14/2010, the S&P 500 closed¬†at 1089.63, slightly¬†below¬†its price of 1107.93¬†6 months prior.¬†Therefore, Hussman sees this criterion¬†as having been met.
Yet how quickly did this predictor reverse course? Here on 6/18/2010, the S&P 500 closed at 1117.51, slightly above the 1102.47¬†price from 6 months ago.
Not only does the criterion miss by Hussman’s own conclusions, but the better predictor for investing implications is the 200-day moving average. On 6/14/2010, the S&P 500 was still below the 200-day trendline, but by 6/18/2010, it finished its 4th consecutive day above it.
At this precise moment, then, we do not have stock prices that are lower than 6 months earlier. In fact, the S&P 500, Russell 2000, Wilshire 5000, Nasdaq and Dow Industrials are all above the price from 6 months ago.
For ETF enthusiasts, there may be no better evidence for relative optimism than¬†the price movement of¬†Rydex S&P 500 Equal Weight (RSP); the exchange-traded fund is above its long-term trendline, and… using the 6-month Hussman time log…¬†the lows of June were not lower than the lows of February, January or December.
What about Hussman’s point on manufacturing? Didn’t the Fed Philly Index on manufacturing¬†activity¬†recently plunge? Isn’t PMI drifting lower? Didn’t FedEx issue disappointing guidance?
From my vantage point, the Empire Index for New York offsets Fed Philly. What’s more, 59.7… anything over 50… represents expansion in the manufacturing sector.
Still,¬†the price movement of the¬†iShares DJ Transports (IYT) is more important¬†to investors than¬†any¬†manufacturing data points. When transporters are earning bucks, it typically means that¬†they’re moving more¬†“stuff”¬†from¬†manufacturers to big industrial companies like the Caterpillars, 3Ms and¬†Home Depots. So if IYT is an uptrend, one may have less to fear about either a recession or a market collapse.
With all due respect to Mr. Hussman, a bearish bias may be hurting his investment decision-making. IYT is currently enjoying a reasonably robust uptrend. Until and unless IYT breaks down completely, investors have the right to be cautiously optimistic… no matter what name (e.g., recession, depression, expansion, stagflation, etc.)¬†one gives to the U.S. economy.
Disclosure Statement: ETF Expert¬†is a web log (‚ÄĚblog‚ÄĚ) that makes the world of ETFseasier to understand. Gary Gordon, MS, CFP is the president of Pacific Park Financial, Inc., a Registered Investment Adviser with the SEC. The company and/or its clients may hold positions in the ETFs, mutual funds and/or index funds mentioned above.¬†The company receives advertising compensation¬†from Invesco PowerShares Capital Management, LLC and Geary Advisors, LLC. The commentary does not constitute individualized investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities. Investors who are interested in money management services may visit the Pacific Park Financial, Inc.¬†web site.¬†