Value investors love low prices. Ideally, you should be buying securities at bargain-basement valuations. Such bargains are typically more prevalent during market downturns. But how does one identify potential down periods? Here are three market indicators that have historically preceded recessions.
Purchasing managers index
The U.S. manufacturing purchasing managers index is a survey conducted by the Institute of Supply Management, which asks managers at various industrial companies to gauge a number of factors for their business, stating whether they believe conditions are improving or worsening. The index runs from 0 (bad) to 100 (good), with a score of 50 indicating no change in sentiment.
Over the last year, U.S. PMI has been falling, from a high of 56.6 back in January to a low of 47.8 in September. This was the lowest reading recorded since June 2009, when the index hit 46.3. Such a collapse in industrial sentiment obviously does not bode well for the economy as the expectations of industrial managers affect variables such as future demand, inventories and much more. Historically, this has been a harbinger of recession, leading to lower stock market returns.
Consumer confidence
In contrast, U.S. consumer confidence, as measured by The Conference Board (a non-profit business research group), is currently high. This is a survey of U.S. households that is used as a gauge for how well average consumers are feeling about the economy. The University of Michigan puts out a similar "Consumer Sentiment" index.
Although a high level of consumer confidence may sound like a reason to be positive on the market, the reality is households are typically the last economic actors to catch wind of a coming downturn. As a result, consumer confidence often peaks right before a downturn, as occurred in 2007 and 2000.
Jobless claims
Employment rates offer insight into the state of the labor market, which is obviously closely tied to the health of the overall economy. In particular, jobless claims, which is the number of people claiming unemployment benefits, is a useful piece of data because it leads the unemployment rate data.
Unemployment is currently near historic lows in the United States, a point which is supported by jobless claims. However, given the state of the other two indicators discussed, there will be heightened attention devoted to jobless claims numbers as a significant uptick in this economic metric could be perceived as a sign that the economy is sliding into a full-blown recession.
Read more here:
- Peter Lynch's 6-Step Investing Checklist
- Buffett and Munger: Derivatives Pose Systemic Financial Risk
- Warren Buffett: 3 Tiers of Ownership
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