The month lived up to its reputation as a cruel one for investors ...
September lived up to its reputation as a cruel month for investors and left no doubt that a global bear market is in process. This is confirmed by a range of market indexes, the majority of which have declined in excess of 20%, the traditional bear market threshold (see following table).
Investors are fleeing risk in response to highly unstable economic and financial environment. Investor confidence today is as damaged as in the late-2008/early-2009 period. Investors perceive major risks—most importantly the likelihood of a new recession and the unresolved debt crises in Europe and the U.S.—and poor prospects for sustainable upside progress in risk assets. A recessionary outlook was confirmed last week by the Economic Cycle Research Institute, a private economic research group that is second to none in terms of forecasting the economic cycle. ECRI has a very strong track record, and is conservative about making recession calls. Last week, ECRI unequivocally rendered its recession verdict:
"This is a done deal. We are going into a recession. We’ve been very objective about getting to this point. A broad range—this is not based on any one indicator—this is based on dozens of indicators for the United States—there is a contagion among those forward looking indicators that we only see at the onset of a business cycle recession. These leading indicators have a certain pattern that they present in front of a recession, and that is what we are seeing now.
"A recession is a process, and I think a lot of people don't understand that; they're looking for two negative quarters of GDP. But it is a process where sales disappoint, so production falls, employment falls, income falls, and then sales fall. That vicious circle has started. Our Leading Indexes are saying unequivocally this is a new recession."