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.

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Even though the corporate leverage this cycle hasn’t been piled up as high as previous cycles, the bears argue there are other indicators showing easy money as led to froth in asset prices. The bears show the 3 charts below which have bitcoin, UK property, and old car prices. While there’s speculation in these areas, I don’t think it’s fair to say the stock market is overvalued or that the credit cycle is turning based on them. Firstly, the price of bitcoin was up exponentially in 2013 and early 2014, yet there was no recession. Secondly, old car selling prices might be a cultural issue. Sometimes cars are valued more in different eras. Millennials might be disconnected with cars because they get their license at older ages than previous generations and because they are more likely to live in the city. When they control more of the wealth, old car prices might fall. That doesn’t mean economic weakness is here. Finally, increasing home prices in the UK doesn’t mean much for the global economy. Generally, housing price declines have been localized. The 2008 crisis was a rare event where most areas saw sharp declines in the U.S.

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In a previous article, I mentioned the shortage of single family homes possibly being met with multi family home building. The chart below shows the expected single family homes sales. The lack of supply is causing prices to increase. Don’t get tricked into thinking some of the negative housing reports mean the economy is weakening; demand isn’t being met. Usually the housing market gets in trouble when there’s too much supply and not enough demand. Because we’re in the opposite scenario, it’s unlikely a downturn in hosing is coming anytime soon. The biggest factor that could turn this around would be a weak labor market. There’s no sign of this occurring, so I wouldn’t be worried even though the index is near its previous peaks. I expect the index to stay near where it is now for at least the next few months.

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One of the best arguments the bears have made in the past 12 months has been that the decline in restaurant same store sales usually means a recession is coming soon. That’s because restaurant sales tell us about the health of the consumer and the consumer drives the economy. In September comp sales were down 1.9%; they were down 2.2% on a rolling 3 month average. Comp traffic was even worse as it was down 4.0% in September and down 4.1% on a 3 month rolling average. California was the strongest region as sales were up 0.6%. That might change next month because of the devastating forest fires. Florida was the weakest region as traffic was down 8.8%. That’s because of hurricane Irma.

Although this looks like gloom and doom for the industry, there has been improvement in the past two months when you exclude the storm effects. July same store sales were down 2.8%. Excluding hurricane Harvey, August same store sales were down 1.8%. Texas had a 5.1% decrease in August because of Harvey. Excluding Florida, same store sales in September were down 1.4%. Although these numbers are all negative, there’s a glimmer of hope that the industry is rebounding. It wouldn’t be surprising to see close to a positive comp number in October. This improvement lowers the red flag this industry has been waving for a few quarters.

Conclusion

I went through some of the arguments the bears have been making in their attempt to justify selling stocks. Obviously, that strategy hasn’t worked out, but it’s still worth explaining the reasons why each point is incorrect. Knowing why the bearish arguments are wrong helps you understand what changes could occur to make the environment for stocks less favorable.