Wealth Effect Increases and Recession Risks

What is the “wealth effect,” and why is it important? It is a great question and reminded me of “A Funny Thing Happened on the Way to the Colosseum. The hysterical play by Craig Sodaro features a naive Swiss farmer heading for Rome. His dream is to become a stand-up comedian. Little does he know what adventures are in store for him. Stumbling into the house of General Spurius Sillius in search of food, he’s mistaken for the dreaded gladiator, Terribilus, due to fight in the Colosseum the next day. Simplcuss must figure out how to save himself. He overhears the General’s wife, Drusilla, and Senator Publius Piscious plotting to kill the Emperor’s daughter and the Emperor himself!

Without telling you the ending, there are many similarities to the market currently. Recently, there have been many “pundits” with stories of “Recessionus Terribulus. Such is not surprising, and as discussed in “Recessionary Indicators Update,” the recession indicators remain abundant.

As with market cycles, the economy cycles as well. There is little argument that the current economic data is fragile, whether you look at the Leading Economic Index (LEI) or the Institute Of Supply Management (ISM) measures. The Economic Composite Index, comprised of 100 hard and soft economic data points, clearly shows the economic cycles. I have overlaid the composite index with the 6-month rate of change of the LEI index, which has a very high correlation to economic expansions and contractions.”