Business and Consumer Volatility Index vs. Stock Market (Profits, GDP, Personal Income, Initial Claims)

The Business and Consumer Volatility Index adds up the: 1) continuously compounded annual rate of change in Real GDP; 2) year-over-year percent change in Corporate Profits Before Tax (without inventory and capital consumption adjustments); 3) average of the year-over-year percent changes in "Real Disposable Personal Income" and Real "Average Hourly Earnings of Production and Nonsupervisory Employees: Total Private" (subtracted the CPI); and 4) subtracts the year-over-year percent change in the 4-Week Moving Average of Initial Claims.

Since year 2000, every time the Business and Consumer Volatility Index plunged below 0% and made a new low, a bear market and recession usually occurred within the next few months or quarter. The indicator didn't work in the 1970s and early 1980s because inflation and initial claims for unemployment insurance were very high and volatile. And towards the end of the 1980s, the indicator actually predicted the 1990 recession and bear market with a longer lag. (The indicator gets updated on a quarterly basis and the Wilshire 5000 gets updated on a weekly basis, so keep in mind the long lag.) Now deflationary pressures, loose monetary policies, and asset price inflation are directly affecting the markets, consumption and economy. I think the next couple of quarters will be important to watch on the chart (Q2 isn't on the chart yet). The interactive chart I analyzed and embedded goes back to 1979, but you can adjust the start and end date.

(This FRED chart was reformatted on 11/17/2016)

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