The Independent Market Observer

Market Downturn Ahead? Focus on the Data, Not the Date

Posted by Brad McMillan, CFA®, CFP®

Find me on:

This entry was posted on Sep 14, 2018 2:04:47 PM

and tagged Commentary

Leave a comment

market downturnYou know the old saying: hindsight is 20/20. Apparently, foresight is as well because I have recently seen several prominent economists and investors calling for a recession in 2020. Repent, the end is near—but not all that near.

I don’t actually disagree with the conclusion, although I think there is a good chance a downturn might happen before that. Nor, per yesterday’s discussion on the great financial crisis, do I disagree with the need to anticipate and plan for a downturn. What I do find questionable is the need to hang a date on it.

The wrong call

I have been guilty of this myself, of course. I am on record as saying the downturn might well be in 2018, only to have tax reform and higher federal spending actually push growth up this year. I was going to be right, but events got in the way. In my defense, I was pointing out something that could happen, rather than making a prediction. Nonetheless, here we are. My data was excellent, my reasoning flawless, and then reality intervened. Even when the downturn comes—and it will—early is still wrong.

Taking a look at my call and what happened afterward, though, highlights the risks here. The call, at the time it was made, made sense and will, I suspect, ultimately be proven right. The same, no doubt, will be true of the 2020 calls that are being made right now. Still, a lot can happen, both good and bad, between now and then to make those calls fail.

Data versus predictions

So, what should we take from the recent headlines? That risks are high? Anyone who has been reading this blog realizes that. That conditions right now are so good that they are almost bound to roll over? Ditto.

While risks are high, they have been so for years. I remember getting into a fairly serious argument on TV with a hedge fund manager and with someone who later became a politician about whether the economy was going to collapse. I said no, and they said yes. This was in 2014, and they were right about the risk level. But high risks are not immediate risks. Got that one.

Given that, the other message we could draw is that with very respected analysts looking at trouble in 2020, we don’t have to worry until then. Obviously, I strongly disagree with this line of thinking. We need to keep an eye on the data, not the predictions.

Don’t get hung up on the date

Right now, the data is quite strong. It suggests that while the end may be near, the 2020 call that says it is not all that near may be correct. It takes time for conditions to roll over. Most of the indicators I track have lead times in the 12- to 18-month range. 2020 looks right on that estimation. Things can change, though. To get hung up on the date is to miss the data. When conditions do change, it will be the data—not the date—that signals that change.

I have made this case before, of course. The seven-year market cycle is a great example of imagined calendar dependency, as are the various metrics about market returns in various years of a presidency. These indicators may even be useful, on a calendar basis. But they are even more useful if you actually look at the underlying causes, rather than the calendar itself.

2020? Maybe. Personally, I will keep looking at the data, not the date.

Subscribe via Email

New call-to-action
Crash-Test Investing

Hot Topics

New Call-to-action



see all



The information on this website is intended for informational/educational purposes only and should not be construed as investment advice, a solicitation, or a recommendation to buy or sell any security or investment product. Please contact your financial professional for more information specific to your situation.

Certain sections of this commentary contain forward-looking statements that are based on our reasonable expectations, estimates, projections, and assumptions. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. Past performance is not indicative of future results. Diversification does not assure a profit or protect against loss in declining markets.

The S&P 500 Index is a broad-based measurement of changes in stock market conditions based on the average performance of 500 widely held common stocks. All indices are unmanaged and investors cannot invest directly in an index.

The MSCI EAFE (Europe, Australia, Far East) Index is a free float‐adjusted market capitalization index that is designed to measure the equity market performance of developed markets, excluding the U.S. and Canada. The MSCI EAFE Index consists of 21 developed market country indices.

One basis point (bp) is equal to 1/100th of 1 percent, or 0.01 percent.

The VIX (CBOE Volatility Index) measures the market’s expectation of 30-day volatility across a wide range of S&P 500 options.

The forward price-to-earnings (P/E) ratio divides the current share price of the index by its estimated future earnings.

Third-party links are provided to you as a courtesy. We make no representation as to the completeness or accuracy of information provided on these websites. Information on such sites, including third-party links contained within, should not be construed as an endorsement or adoption by Commonwealth of any kind. You should consult with a financial advisor regarding your specific situation.


Please review our Terms of Use

Commonwealth Financial Network®