Recession Model Update (July 2020)
Friends,
In a coincidence of timing, NBER officially declared the current recession 1 day after my previous update. Click here for the full announcement, where NBER also discusses some nuances of evaluating this current cycle:
“The fact that the monthly peak of February occurred in the middle of 2020Q1 while the quarterly peak occurred in 2019Q4 reflects the unusual nature of this recession.”
Since the recession is officially here, I am tempted to evaluate the performance of both the Recession Predictor and Turbulence Index heading into the current downturn.
Eventually, I will perform a comprehensive analysis of both indicators going into the current recession, covering several topics such as:
Did the Recession Predictor truly “predict” the current recession in any meaningful way?
How reliant is the Recession Predictor on the Yield Curve slope feature? Across the 6 features, I suspect that the Yield Curve slope is *by far* the most influential feature for the model’s predictions.
For now, one initial observation: as mentioned in the May 2020 update, it appears that rising model probabilities matter more than the absolute probability levels (how close the levels are to 100%), especially for the 6-month and 12-month time horizons:
When will this recession end?
Going forward, I will attempt to use the Recession Predictor to gauge the end of the current recession. When observing prior cycles, recession probabilities seem to fall rapidly at recession end:
Therefore, it might be a good idea to look for the same pattern to repeat, indicating an end to the current recession.
Turbulence
Despite the meteoric rebound in stock prices, market turbulence is just starting to decline meaningfully. Going forward, I’ll look for turbulence to continue dropping sharply to confirm a return to normal / bull-market friendly conditions. However, if turbulence remains elevated, that may be a sign that things are not as stable as they seem.
Until Next Time
Terrence | terrencez.com
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