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Traphagen Recession Index

The Traphagen Recession Index (TRI) is a proprietary economic index developed by Traphagen as a tool to help predict US GDP growth rates and possible recessions. The TRI incorporates several different factors that have had a history of predicting recessionary periods months ahead of the official recession start. Some of the factors we actively monitor and are incorporated into the index include US corporate profit margins, Treasury yield spreads/trends, non-farm payroll trends, two different Leading Economic Indicators (LEI).

The TRI can range from 0 to 100 (although for the vast majority of the time should be in the 10 to 70 range). The index levels should be interpreted as ‘the percentage of a recession within the next 12 months’. Therefore, if the current index level is ‘35’, that means there is approximately a 35% chance of a US recession over the next year. The ‘average’ chance of a recession over any 1 year period is about 15%.

Traphagen developed the index for two main reasons. First, we wanted a reliable, diversified, and useful tool that would assist us in predicting recessions and economic growth rates over the intermediate term. This index is one of many tools we use to help position our client portfolios. Secondly, we wanted to give our clients an easy and accessible way to view our opinion on the US economy over time.


CURRENT TRI INDEX

42.8%



HISTORICAL CHART


CURRENT COMMENTARY


“The TRI closes out the decade indicating a 42.8% chance of a recession within the next twelve months. Over the course of 2019, the U.S. and global economy have shown signs of resilience amidst several geopolitical headwinds. Though it is apparent that the economy is slowing in terms of GDP growth, expansion is still likely. We have a heightened sense of caution around the U.S. election, and now the Coronavirus. Of our seven economic indicators, six of them were unchanged and one showed a negative shift from the prior month.

US GDP in 2019 grew 2.3%, marking a slowing from the near 3% we saw in 2018. Growth in Q4 rose at 2.1%, largely in part to continued strength in consumer spending and a drop in imports due to tariffs. The U.S. economy is still largely dependent on the consumer. Consumer spending for Q4 rose at 1.8%. This number has been robust throughout 2019 – posting gains of 3.2% in Q3 and 4.6% in Q2. Although there was a slowing in consumer spending for the year, it still contributed 1.2% of the 2.1% of real GDP for Q4. Other areas such as a strong labor market, slow price increases and low interest rate also contributed to growth.

Traphagen is still taking prudent efforts in hopes to mitigate risk in client portfolios. Our January rebalance consisted of tactical shifts between asset classes. Most notably the reintroduction of emerging markets equity for our more aggressive portfolios and a tactical shift to U.S. small/mid cap from U.S. mega/large cap. The reason for our small/tactical shift back into EM is attractive valuations, dip caused by the coronavirus, and a fund which enables us to only invest the higher quality EM companies. Within the EM asset class, Traphagen has strategically implemented exposure only to companies that are not state owned enterprises. Over the long term, those companies tend to outperform the broader EM index as state owned companies tend to not operate in the interests of shareholders. As always, we will continue to monitor all indicators and make adjustments where we deem appropriate.

DETAILED DASHBOARD

10 Year vs. 2 Year Treasury Note Spread
% CHANCE OF REC. BASED ON ABOVE METRIC65%
 
US Treasury Curve Shape & Recent Trend
% CHANCE OF REC. BASED ON ABOVE METRIC25%
 
Conference Board ‘Leading Economic Indicator’
% CHANCE OF REC. BASED ON ABOVE METRIC45%
 
AIER Leading Economic Indicator
% CHANCE OF REC. BASED ON ABOVE METRIC35%
 
Stock Market Action/Breadth
% CHANCE OF REC. BASED ON ABOVE METRIC5%
 
SP500 Profit Margin & Trend
% CHANCE OF REC. BASED ON ABOVE METRIC45%
 
Nonfarm Payroll (YoY%)
% CHANCE OF REC. BASED ON ABOVE METRIC45%


FAQ


Q: What is the Traphagen Recession Index (TRI)?

A: Traphagen has incorporated 6-7 different factors that have had a great history of predicting past recessionS while at the same time limiting the amount of ‘false positives’ (or predicting recessions that never happened). We then weight all these factors differently and aggregate all signals into the overall TRI reading. 

Q: When did Traphagen develop this index?

A: Traphagen began research on the index and many different factors in late 2015 and developed the first iteration of the TRI in January of 2016. Overall we expect the TRI to remain largely unchanged through time, but if certain factors lose their predictive ability or others seem more important we can add and/or subtract pieces of the index. 

Q: How does the TRI affect Traphagen’s portfolios?

A: If the TRI is very low (lower than 15) or very high (over 60 or so) we would likely take some action. If the chance of a recession is below average, and therefore very low, we would likely position the portfolio in a more aggressive manor with more stock holdings. When the TRI is high (above 50-60) we would put more defenses in the portfolio and reduce stocks and likely increase alternative/bond holdings. 

Q: How often is the index updated?

A: Traphagen updates all factors and calculates the new TRI index level once per month. 

Q: I am a writer, author, reporter, or other interested party, can I use or quote your index level in my work?

A: You may, all we ask is that you cite the index with the source and Traphagen.