Based on new empirical research findings the Dow Jones 30 (Dow) composite index is likely to soon peak and begin a steady decline. According to the SCPA (Statistical Crash Probability Analyses) algorithm the probability is 90% for the Dow to reach new lows before the current US recession ends. The algorithm’s forecast assumes that the 2020 recession will last until at least March of 2021.
The forecast is based on SCPA research of the Dow’s performance during the five US recessions from 1929 to 2007, which lasted a minimum of one year. The chart below depicts the five recessions.
The research findings revealed that the Dow:
- initially declined after each of the five recessions began
- rallied to interim highs within five to seven months after the recessions had begun
- declined to new recession lows after reaching the interim highs
The five charts below break out the performance of the Dow for each of the recessions.
The chart below for the Dow Jones depicts that the index closed at its post-crash high on August 14, 2020.
Based on SCPA the probability is 100% for the Dow to have already reached its post-crash high or for it to reach the high during September 2020, which will be the seventh month since the recession began. Coincidentally, prior to the SCPA’s recent discovery the SCPA had forecasted the post-crash high to occur for the Dow and the markets of a dozen other countries by September 18, 2020 at the latest.
The Dow’s big question for the recession of 2020 is will it last a minimum of one year? If the answer is yes, the SCPA’s probability is 90% for the Dow to pierce its March 23, 2020 low before the 2020 recession ends. The 90% probability was calculated from a computing the average of the following:
- At the March 23 low the Dow had declined by 36.5%. For four of the prior five (80%) recessions the minimum decline ranged from 41% to 89% before the recession concluded.
- The Dow for all five (100%) of the prior recessions reached its recession low after the seventh of the recession.
The data in the tables below were obtained from a June 15, 2020 Deloitte US economy forecast. The data indicates that the duration of the 2020 recession will be at least one year. Deloitte’s report includes three forecast assumptions for the years 2020 through 2025:
- Best Case
- Worst Case
Deloitte’s best-case scenario in the table below is for unemployment to get below double digits in 2022. Under its worst- case scenario unemployment will not get to below double digits until 2025 (9.9%).
The best-case in the table below is for GDP have annualized or year over year (yoy) growth of 1.0% by end of 2021. Also, under Deloitte’s best-case scenario GDP will not exceed 2019’s GDP until late 2024 or 2025.
The table below depicts that according to Deloitte’s best-case scenario consumer spending will not get back to its 2019 plateau until 2025. For more about the consumer read my August 15, 2020 “Consumer Sentiment Readings do not bode well for President or the market”.
Corporate after-tax profits will not get back to 2019’s level until 2025 under Deloitte’s best-case scenario. Under the worst-case scenario corporate after-tax profits will have declined by 51% in 2025 when compared to 2019.
Other best-case notables from Deloitte’s forecast:
- Household wealth will not get back to 2019 level until 2023.
- Capital Expenditures by businesses will not get back to 2019 level until after 2025.
Deloitte’s best and worst-case scenario forecast for the personal savings rate which is depicted in the chart below is the eye opener. Even under the best-case scenario the consumer is going to retrench. Should Deloitte’s worst-case scenario for the personal savings rate play out a US economic depression would be inevitable.
A factor which could support Deloitte’s worst-case scenarios is Covid-19’s lasting shock effect on the US and global economy. A comparable period for economic shock was during the 1970s when the US and the world had to undergo to oil embargos.
The 1973 oil embargo caused shortages and resulted in the price of a gallon of gas increasing by 400%.
The 1979 oil embargo caused further shocks to the economy.
The oil embargos were likely the reason why the US had two significant recessions (1973-75, 1981-82) within six years as depicted in the chart below.
Like the oil shocks, the Coronavirus, due to its lingering, has increased the likelihood of a much weaker US economy over the next ten years when compared to the last ten years.