I t may seem counterintuitive to doubt the stability of American markets after learning that GDP grew 2.9% in Q3 of 2016. If the sole metric used to gauge the general health of American markets were certain superficial fundamentals (such as GDP), it would only stand to reason that American markets are, at the very least, trudging along. However, a deeper look at historical trends and economic indicators show frightening parallels between previous recessionary periods and our current period.
History Repeats Itself
It’s important to establish precedence in any argument. The table below shows the dates of every single American recession since The Great Depression. Notice that the start dates for each of the recessions are between 7–10 years apart.
Excluding the one anomalous recession in 1973, there has been a very predictable recession every 7–10 years; with eight years being the most common time differential between recessions.
In general, there are also several instances of market declines in the interval between any two recessions. Even in the current recessionary cycle, there have been several market corrections — the most prominent being China, who’s growth declined sharply in August 2015 and is holding steady at ~6.2% GDP growth (although China’s GDP growth would be unprecedented in developed economies, it is very poor for the Chinese. This inconsistency in how GDP is viewed, depending on the country, is one of the main reasons why I believe GDP is a poor indicator of economic health). American markets also suffered a severe market correction to kick the year off in January and February.
The FTSE Foreshadows American Markets
Markets, like many other things in life, give ample time and plenty of warning signs before any radical shifts occur. Historically, the FTSE — the primary market of the British (think NYSE or NASDAQ) has been a FANTASTIC indicator of impending market crashes and recessions.
The graph below is of the FTSE before the previous three recessions — the 1990 recession, the Dot Com bubble of 1999, and the mortgage crisis of 2007. The FTSE peaks about 1–2 years before the American recessions and then sharply falls.
Assuming that the hypothesis above that the FTSE is a solid preliminary indicator of the future direction of American markets is correct, then it should not be an arduous process to reach the conclusion that American markets are going to fall, and they’re going to fall soon. This graph is from April, so it doesn’t account for the Brexit, but British markets have fallen significantly since June when the Brexit vote happened, furthering strengthening the argument that the only thing between America and another recession is one single negative catalyst.
The American Bull Market
In economics a bull market is when all markets in an economic ecosystem are trending upward. The general consensus is that a bull market only lasts for 6 years. If we operate under the assumption that the bull market began after the recession officially ended in 2009, the bull market should have ended in 2015; and end it did.
The S&P500, the Dow Jones, and the Nasdaq have all practically flatlined — remaining almost exactly at the same point they were a year ago, validating the six year bull market theory and signaling the downturn that has historically followed such a period.
Europe Never Fully Recovered from the Last Recession
The entire European Union is failing. In fact, until the Brexit, almost no other country in the Euro (with the exception of Germany and a few other countries) was performing on par with the ailing FTSE.
How could they? The EU never fully recovered from the last global economic crisis. Its financial infrastructure was severely damaged and lacking before it had to support millions of Middle Eastern refugees. Most of the countries in the EU can’t afford to take care of their own citizens; political pressure from the west to hold these impaired countries responsible for the wellbeing of millions of refugees is simply unreasonable and has contributed to the further disrepair of the EU’s already degraded economy. The interconnectedness of the modern world means that if the EU double dips into another economic collapse, the US will soon follow suit.
Asia is Failing
Asia is failing. The Nikkei (NI225/Japan) is down -12.72% year-over-year (y/y), the Shanghai SE (SHComp/China) is down -32.72% y/y, the Hang Seng (HSI/Hong Kong) is down -23.15% y/y, and the Sensex (SENSEX/India) is down -7.36% y/y. Asia is not only the manufacturing hub of the world, but also contains the largest number of emerging markets. If the emerging markets stop “emerging” that means that growth has truly stagnated everywhere.
The United States is doing well. Slow growth is better than no growth or negative growth. However, the economic indicators and historical data shows that we as a country need to brace ourselves for an impending economic collapse. Markets only truly start crashing when people stop making money, and start selling off or withholding their money. In my opinion, this economic collapse started in July 2015, but it’s going to take something else, a negative catalyst of some sorts for American markets to truly be affected, and when it is affected, it’ll be nothing short of devastating.