Divining World Stock Market And Next Recession After Brexit

June 28, 2016

Historical Brexit Vote

The historical Brexit vote last Thursday is certainly an impactful event which is still unfolding.  The British people have decided to leave the European Union (EU). This messy situation will impact other countries beyond EU. For the last days, the world stock markets have been falling dramatically triggered by this Brexit vote.

In this article we analyze the future direction of world stock markets and the timing of the next deep recession.  We have been working on this issue before the Brexit vote.  We feel that while Brexit vote is important from historical perspective, it is a merely trigger for our analysis.  Our analysis in this article does not depend on the outcome of the vote.  In this tumultuous time, we expect more shocking triggers e.g. from the Middle East ISIS or the unstable abd unproductive state industries in China.  The triggers only contribute to the intensity of our analytical results.  We will discuss our analytical work on triggers in other articles.

World Stock Markets Falling in Synchrony

The following chart shows two equity profiles:  (1) DOW and (2) Morgan Stanley world stock market aggregate index  MSWORLD excluding US.  Note all the world stock markets have been falling since 2014-2015.

  • In particular, the world stock markets (MSWORLD-US) falling much faster and earlier than DOW.
  • There are 3 bubble peaks in both DOW and MSWORLD-US index.  The latter has a much lower 3rd peak than its own 2nd peak, and clearly much lower than DOW’s 3rd peak. It looks like FED has achieved championship in paper currency printing.
  • Let us identify and label these 3 peaks:

2000 Peak ->              Dot-com Tech Bubble

2008 Peak ->              Credit Expansion Housing Bubble

2015 Peak ->              Global Currency Printing Bubble

Globalization has its tremendous advantage as well as its disadvantage from the financial and economic perspectives.  When a country like US or UK or China is in trouble, the globalization phenomenon can pull down the rest of the world.  There are many fine publications on this website regarding the synchronous nature of the world stock markets in detail.  We will just consider the US market and project the next economic downturn and recession.  The resulting recession here will impact other countries.

Falling Stock Market & Next Recession

We first use the monthly S&P 500 data (GSPC) in analyzing the 3 bubble peaks mentioned in the above section.  Our Fourier cycle analysis shows that the current 3rd bubble peak S&P 500 will reach its lowest bottom in July 2019 timeframe. 

How does the lowest bottom relate to the next recession?

Previous study from dishort.com and other websites show the good linkage of stock market bottom with the recession. Our task is in the forecast of the next stock bottom and hence link it with the likely next recession.  In the next section, we go a step further and analyze the available data from FED leading indicator and the timing of recession.

Since the black Brexit Friday (June 24) is a notable date for the big synchronous falling of world stock prices, we use that date as the start of the next recession.  The following table summarizes the likely next deep recession and duration of the recession:

The table show that this coming deep recession will be 3 times longer than the average of the past 10 recessions in US.

Fed’s Leading Indicator

We apply our cycle analysis to FED’s leading indicator data from 1982 to current 2016.   Our leading indicator projection is in conformity with the stock market analysis result.

Confirmation from Gold Price

In our series of articles on gold price, we noted that the current gold bull market began in 2000.  After a 4 year correction, the gold bull now resumes its explosive rise.  We also noted that gold is inversely correlated with DOW or S&P500.  We first show the earlier result of our gold analysis. We then study the upcoming gold peak with possible linkage to the next recession.

It is interesting to note that the year 2019 is the possible end of the next recession.  It is not unreasonable to think that gold price often rises during recession, while the equity market crashes during tough economic time.  In trouble times as now, gold will very likely rise in recession.

Summary

Our different analyses presented in this article all point to a severe economic downturn soon. The recession may in fact be starting now and ending in three years time. 

Note of Optimisms

Unlike the doomsday articles on the internet and some with no technical and rational background, we maintain optimism and hope for this country.  The next recession will likely be deep this time.  However as in previous recessions, including the Great Depression in 1930’s, we will overcome with fundamental faith of the Republic.  Who knows, some of us may even gain financially if we hold the right assets during this awesome period.

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Caution:  We are not professional financial managers.  For personal investments, please do your own research and consult your financial advisor for help and advice.

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F.T. Dao is a private investor and recently left the corporate world for technical analysis of stock markets.  He holds a PhD degree in physics and has done technical analysis of the market on the side for many years.  He welcomes constructive discussion and can be reached at:  ftdao245@gmail.com  , ftdao245@comcast.net

USA has the world’s largest holdings of gold: 8,134 - representing 77% of its Total Foreign Reserves.

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