The good news is that the next recession shouldn't occur until about 2019. We have a good three to four years before we'll be peering into some abyss. The bad news is that the stock market usually, (but not always) is a forward indicator of weakness in the economy. Stock prices are supposed to reflect what investors expect to be future earnings of companies. If signs on the horizon indicate a slowing down of the economy, then it stands to reason that stock prices can be expected to decline before the recession itself reaches full force. They start rising during the worst of the economic malaise.
Professionals struggling to predict the future of economic factors obviously don't wait until the actual event. They use high-school calculus (remember the first and second derivatives?) to identify times when a rate of change in the direction of a line plotting an economic component is speeding up or slowing down. For example, when a component of the economy is rising and the rate of that rise is increasing from period to period, this represents an indication of a continuing rise. If the rate of change begins to taper off, even while the line is still moving upward, this is the first indication that the direction of the line will reverse before long. It's the first hint of what the future may bring.
So this brings us to our friends at the Institute of Trend Research or ITR Economics back in New Hampshire. This is the company in the business of predicting future economic events for almost forty years with a high probability of success. Their leading indicators point to a slowing of grown overall, but with growth still occurring nonetheless. In their view, what would trigger the beginning of a bear market in stocks would be two successive quarters of Gross Domestic Product decline. Based on where we are in the current business cycle, that is not expected to happen for awhile since the RATE of growth is the only thing declining at the moment.
Meanwhile, other stock market considerations include the basic fact that we are now in the seventh year of a sustained bull market and only two times in the past 85 years has this been the case. Starting in the 80's, the market generated positive gains for twelve years in a row.
For some, a better test for corporate performance can be the direction of sales --- the top line as opposed to bottom-line profits. While American companies registered their most profitable year in history last year, there is a concern now that sales are beginning to taper off. Part of this problem is attributable to the energy industry which saw its total revenues drop by one third last year. This reduces total S&P 500 sales by 5 percent. Minus energy, there was actually a gain of about 2 percent, so the tapering off is largely attributable to a single industry.
"The market rises on a wall of worry," so the saying goes, and having issues to worry about comes with the territory of investing in equities. Trying to factor in all these moving parts can give us headaches. The thought we want to hold as amateur investors is that we can insulate ourselves from these shifting sands with a combination of the right investments and the right mindset.
Large companies that pay dividends reduce the impact of market sell-offs. For example, in 2008 the average dividend of the S&P 500 suddenly bounced from about 2 percent to 4 percent as stock prices shrank by 50 percent. Dividends per share held up. Moreover, the stock market is so resilient that we have had only three calendar years in the last forty when the market for the year actually finished more than 12 percent lower that its value at the start of the year. An appreciation of this history, then, combined with value-oriented, dividend-producing stocks, is the financial equivalent of dropping a tab of Ambien --- as today's aging "hippy" might say.