Most financial commentators make a big thing about GDP growth. My question is does GDP growth provide any value to predicting the behaviour of the stock market.
Recession Alert has a more thoughtful econometric approach to many of the competitors in the industry. They have a terrific ensemble probit regression model that pretty much forecasts every recession. If this is accepted to be true, well at least since 1968 then what does this tell you about trading the markets knowing about recessions in advance.
Before we address that key question let me say, while I like the regression modelling Dwaine has done, I have a terribly uncomfortable feeling that his model has been hopelessly curve fitted. So while he is enjoying the benefits currently of correctly holding off on a forecast recession in 2013 which the leading competitor messed up on I am still unsure of the validity of his model with such a small sample size.
Coming back to Recession Alerts findings for the 7 recessions called since 1968, it is believed that the markets topped on average 7 months before the NBER officially announce the recession. With this in mind it is this companies stated objective to forecast when the economy is likely to go into recession.
I plan on getting to some statistical research shortly on the subject, but something is nagging at me that RA’s models are a little too fine tuned to my liking. I watch how things unfold with interest. I would love to post some of the visuals but Dwaine looks serious about his intellectual property so I best avoid that. Especially that this post critique’s his research.