Let’s follow up a little bit on the note earlier from SocGen’s Albert Edwards, who is still predicting that the US will go the path of Japan.
I have long maintained that even within a structural bear market, there are huge returns to be made in equities from participating in short-lived cyclical rallies like the one we have just seen. The Nikkei regularly used to enjoy 40-50% rallies as policy stimulus drove pronounced cyclical upturns in both GDP and profits. You had to remember however that you were still in a structural bear market and you had to get out when the cycle began to top out. A downturn in the leading indicators proved to be a very useful sell signal for equity investors.
What did he mean?
The following is a chart published last December, and it shows the Nikkei (starting in 1991) and Japan’s own set of leading economic indicators.
Within Japan’s multi-year mega bear market, there were several big up moves, but the leading indicators consistently mapped the move. Right now the US’ own leading indicators are pointing sharply lower. If we’re Japan, that’s the direction stocks should be heading.