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Using ETFs to Read the Economy

NEW YORK (ETF Expert) -- According to the chief U.S. market strategist at RBC Capital Markets, Jonathan Golub, seven of the last eight bull markets ended at the onset of a recession. There are several problems with this assertion.

First, it represents an ethnocentric "read" that ignores the interconnected nature of the global economy. Slowdowns in the respective economies of China, India and Brazil did not meet criteria normally associated with recessions; nevertheless, deceleration in each country's gross domestic output occurred alongside brutal stock market bears.

Another significant problem with the statement is the idea that the "onset" of the recession might somehow be determined beforehand. The National Bureau of Economic Research did not determine the last recession's beginning had occurred in December 2007 until December 2008.

Investor's Business Daily asked my opinion in January 2008 about the probability of a recession in the year ahead (2008). While I indicated that there was an 80% likelihood, I did not claim the recession had already started. By the time the powers-that-be had officially declared the recession's onset -- one year after the fact -- the SPDR S&P 500 Trust (SPY) had already collapsed.

SPY Recession Call

In truth, it is the fear of "bad times" that causes stocks to sink, and the depth of the setback is typically related to the intensity of the emotions. Anxiety, angst and apprehension? We may see stocks "correct" five to nine percentage points. Trepidation, tension and distress? A selloff may meet with a decline in a range of 10%-19%. Panic, hysteria, horror? A stampeding for the exits may send stocks down 20%, 35%, 50% or 65%.

It would be nice to think that there are a few brilliant souls with the power to discern when a hiccup will morph into something terribly tragic, whether the tragedy relates to an economy or a stock market or both. Yet, there's a goat for every guru (and every guru has been or will be a goat).

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