Not Enough Leverage For A Recession?

With the business cycle lasting over 8 years, many are wondering when it will end. Because the last recession was so severe, people have been making a business out of spreading fear. There were two large drops in about a 10 year period making some think bull markets always end in devastation. Many people avoided tech stocks after the 2000s crash and many avoided real estate after the financial crisis. Because both crises were so close, it has led many to leave the stock market entirely. This skepticism has provided fodder for the stock market. Bull markets are built on fear and bear markets are built on complacency.

Looking at the economy and deciding that a recession is coming just because we haven’t had one in a while is not the type of rigorous analysis that will help you prosper. It’s fine to be bearish, but you need to come up with a better reason than saying we’re due for a crisis. The chart below aims to come up with a time clock for when the next recession will occur. As you can see from the chart on the left, the leverage taken out by corporations this cycle isn’t at the same rate as any of the past 3 cycles prior to them ending in a recession. The staling of the leverage taken out that you see at the end of the 8 year line is the energy crisis that hurt frackers. The frackers took out too much debt when oil was near $100. After it fell to below $50, many of these firms went bankrupt.

The financial stress caused by this decline in oil pushed yield spreads higher. It made most companies thought the country pause the amount of leverage they took out. Some thought a recession was afoot. In fact, it looks like the oil problems have delayed the next recession by a few years. The chart on the right shows the 5 year moving average for S&P 500 earnings growth came close to where it was during the prior 2 recessions. Because it was mainly one sector causing the weakness, no recession occurred. That being said, if the sector seeing weakness was technology, there would have been a recession because it is the largest sector in the S&P 500.