Recession Talk Is Mythology – ValueWalk Premium

Recession Talk Is Mythology

“Davidson’ submits:

Q4 hedge fund letters, conference, scoops etc


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The best investment opportunities occur when market psychology leans far from the economic facts. The current period is one of these. Recession fear still dominates the media while economic trends in place since the beginnings of the current cycle in 2009 continue to trudge higher. Employment reports today provide confirmation. Economic trends, now involving billions of individuals globally, only change direction very slowly providing more than adequate warning. Recession fears today are a one of many myths which have ebbed and flowed during the current cycle. These fears come from traders whose primary input comes from security prices believing these to be superior to economics. Price tends change often which is important to traders on margin, using borrowed funds, as small price shifts can translate to significant impact on capital. Economic trends develop at a snail’s pace.

Recession Talk

The Value Investor Index for the SP500 shifted a little higher with the drop in recent 12mo Trimmed Mean PCE readings. The Value Investor Index is calculated with inflation in the denominator, lower inflation justifies a higher SP500. The drop in the SP500 to 2346 on Dec 26th made the premium to the Value Investor Index at 2317 less than 2%. This was a period of elevated buying by corporate insiders who are deemed the most knowledgeable of Value Investors. Since Dec lows, the SP500 has recovered just over 19%.

Fears of another ‘Great Recession’ flooding the media have evaporated with many companies reporting positive earnings’ surprises. The 12mo Trimmed Mean PCE has recently fallen from slightly over 2% to 1.9%. Inflation has not accelerated even with the recent rise in government spending, the historical correlation. This may be due to government spending being monitored by the current administration for the benefit received. If so, careful spending is welcome, as it is not the historical pattern. Time will tell.

Currently, the SP500 is fairly valued and does not reflect levels of speculation associated with market and economic peaks which recent history places at a 60%-100%+ premium to the Value Investor Index. Note: the Value Investor Index is primarily used to identify market entry levels for Value Investors and not market tops.


The employment, vehicle and inflation data reported the past 7days are in line with long-term trends of the current cycle. Inflation appears to have fallen a smidge. Equity prices, which have mostly recovered from the Oct 2018-Dec 2018 bout of ‘Great Depression’ fear, are likely to move higher as market psychology continues a shift towards optimism by economic data.

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