With the gross domestic product number hitting the tape Friday, many wonder if the recession is over. Since GDP is the broadest measure of aggregate economic activity and encompasses every sector of the economy, that sounds like a good number to look at when trying to determine if the worst is behind us.
Another way to make that determination would be to take a look at those sectors that typically lead when coming out of a recession.
More than a decade ago, I picked up this nice visual aide showing the primary stock sectors and how they behave in relation to the phase of the economy as well as the phases of the stock market.
I use it from time to time when speaking of big picture considerations.
Assuming the correlations regarding sector performance as well as economic and stock market cycles haven't been repealed, if we look at the various sectors to see which ones are outperforming we should be able to correlate that with where we are in terms of the economic cycle.
For example, if we were to determine that finance, technology, and industrials are outperforming other sectors of the market, then it stands to reason that the market has or is probably bottoming and the recession has or is probably ending. If industrials, basic industry and energy are leading, then we are further along the cycle curve.
The following table summarizes the lows to highs for each of the sectors along with the percentage gains they represent. Most of the lows occurred in March 2009, although a few occurred in October 2008.
It's interesting to note that the best performing sector is retail if you view retail solely through the
SPDR Series Trust SPDR Retail ETF
. Combining health care with it changes the story quite a bit though. Leaving aside that seeming anomaly, the financial and cyclical sectors are the leaders.
Now, if we group the sectors together that comprise a similar cycle, then we begin to see something a bit more interesting. Here are those groupings.
Depending on how you group the sectors, you naturally get differing results but it seems reasonably clear that the economic cycle labeled "Full Recession" has the largest percentage gains (either with the cyclical sector included or not). The sectors comprising that grouping have outperformed the others by about 18% in the aggregate.
Again, circling back to the individual sectors, basic industry is outperforming as well while energy still lags.
Given the preponderance of performance data available from the market, it appears to this observer that we are somewhere around the trough of the recession and heading into the early recovery stage. So bring on the GDP data and let's see what it says.
Now what the market can't tell us yet is what kind of upside is to be expected with respect to the upswing in the economy. Similarly, it cannot tell us how lasting it might be. For that, you need to look elsewhere and to await more market yielding information. For now, it's probably safe to say the recession is likely done.
At the time of publication, Little had no positions in the securities mentioned, though positions can change at any time.
L.A. Little, author, professional trader and money manager, writes daily on
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His background includes degrees in philosophy, computer science, computer information systems and telecommunications. With a trading philosophy centered on capital protection first and the accumulation of consistent gains over time, L.A. espouses a simplistic technical approach to trading the markets that is a throwback to the days of past. With a focus on swing points and the qualification of trends, L.A. provides a breath of fresh air to an otherwise crowded room of derivative indicators with the emphasis on technical minutiae.