With many equity markets having fallen 20% from their peaks, meeting a common definition of a bear market, investors, analysts, and journalists understandably seek a narrative that gives it meaning. At the very start of the year, the culprit singled out was drop in Chinese shares and the yuan. However, the yuan has stabilized as the PBOC drew down another $100 bln of reserves in January to help ease the pressure what appears to at least in part be a speculative attack by hedge funds (who conclude the yuan is overvalued).  

Some narratives attributed the market turmoil to the drop in oil prices. From the end of 2015 through January 20, the price of black gold fell by nearly 30%. Here too the explanation was not very convincing, and despite the recovery in oil prices over the past two weeks, investors are still anxious. We note, for example, that the German DAX finished last week at its lowest level since late 2014.   

A third narrative has been constructed: the US is recession-bound or worse. The Senior Investment Commentator at the Financial Times wrote that the tightening of lending conditions reported by the Federal Reserve’s Survey of Senior Loan Officers is a “reliable harbinger of depression in the past.” We have argued that there is no agreed upon definition of recession or depression.  We have suggested that the word recession was ideological construct to distinguish the end of a business cycle with the experience in the late-1920s through much of the 1930s.  The use of the word depression here is reflective of the extreme swing in market psychology. And it is over done.  

The US economy is not contracting though the fallout from the energy sector the on dollar-value of industrial output, new orders, capex and the like is palpable. Not only is the US economy not contracting, but it is accelerating here in Q1.  Specifically, the initial estimate of Q4 15 GDP was a lowly 0.7% annualized. Subsequent data suggests scope for a modest upward revision. More important, Q1 15 growth tracking 2.1%, according the Atlanta Fed GDPNow. 

The January employment data showed more Americans are working, for somewhat higher pay and the workweek increased.  Although the overall job creation was a bit less than the consensus expected, as the economy reaches full employment job growth is going to slow.  However, job growth remained sufficient to absorb more slack in the labor market. The unemployment rate ticked down to 4.9%.  This is not associated with the end of a business cycle.  

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