Prediction of recession: metric shows that the stock market does not see any slowdown

Investors bet that the American economy will continue to grow and that they behave as if there was “not” recession Risk anything “,” The Leuthold Group market study wrote in a note last week.

This conclusion is based on a key indicator, the cyclic / defensive ratio S&P 500, which compares the most economic sectors on the economic level, such as the consumption discretion, industrialists and materials, more stable market areas such as consumption staples, health care and public services.

The Leuthold group calculates this metric according to the price for the benefit, the price at the cash flow, the price / price / price ratios.

Cyclical actions are generally negotiated with a discount during recessions because their income is more vulnerable to economic slowdowns. Investors, on the other hand, pay a relative bonus for the security of defensive actions with a more inelastic demand.

In May, this ratio reached a summit of 1.19, indicating a 19% bonus for cyclical actions compared to defensive actions. This is not an anomaly, because the ratio was maintained above 1.05 – placing it in the 10% higher of historical readings – for 13 consecutive months.

Recession fears have come down since I reached a fever in April. After the announcement of a 90 days pricing break And trade negotiations With China, the chances of a recession increased from 66% to 28% on the prediction market Polymarket.

However, several Wall Street strategists are still concerned, because 28% of recession is always higher than the long -term average of around 15%. Torsten Sløkchief economist in Apollo, and Jamie DimonCEO of JPMorgan, sounded the bell stagflation concerns.

According to the Leuthold group, 28% of recession is still far too high depending on what the market is targeting. Before past recessions – including 2000, 2008 and 2020 – The cyclical sectors were negotiated at discounts raised to their more stable counterparts.

The average evaluation gap of the market peaks before the recession was around 25% in favor of the defenders. During these recessions, the average evaluation gap increased to 38%.

“A large part of the” discount “of recession in the comparative evaluations of cyclics occurred during the twelve months (or earlier) preceding the stock market before the recession. Today, this process does not seem to have started,” wrote the company.

The high S&P 500 cyclic / defensive ratio also reflects certain evaluation changes that have occurred in recent decades. Defensive stock The evaluations have decreased as long -term growth in consumption staples and health companies slow down.

These companies are now negotiated with a 10% discount compared to the S&P 500, against an average premium of 10% since 1990. In previous markets of recession bears, defenders exchanged a premium of 33% compared to the rest of the market, suggesting a room for a defensive return if the return of recession fears. If this happens, investors strongly exposed to cyclics will suffer the most.

Investors continue to bet on the most economically sensitive parts of the market. As long as cyclical actions retain their evaluation bonus against defenders, it seems that there is no fear of the recession to worry.