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Consumer spending drives it all (4)
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Figure 8-4: Bear markets begin when growth in real consumer spending (PCE) peaks and begins to slow
Figure 8-4
Uptrends and downtrends in real-consumer-spending growth drive far greater swings in corporate profits, represented here by Y/Y growth in S&P 500 earnings per share (green line: note greater volatility of right-hand scale). The relationship between economic slowdowns (led by downtrends in Y/Y consumer spending) and bear markets (vertical yellow bars) is remarkably consistent, though not infallible, over many cycles. Most bear markets begin (see red circles) when the Y/Y rate of growth in consumer spending is peaking, and investor and general business optimism are at their highest! Considerable courage is required to reduce investments at such times. Finding an effective discipline for forecasting downturns in (the rate of growth of) consumer spending is essential to reducing stock market exposure, against conventional wisdom, at these junctures.

Most bear markets then proceed as (the rate of growth in) consumer spending continues to slow, and are largely over by the time recessions (black bars) are under way. Importantly, most bear markets end (see blue circles) when consumer spending and S&P 500 profits are at, or even prior to, their worst Y/Y comparisons. In a mirror image of stock-market peaks, considerable courage is required to wade back into the stock market at such times!
Current Comment: The slowdown in real-wage growth over the past 1� years (albeit with aa slight improvement in mid-2012), detailed in Figure 10-4, indicates that Y/Y growth in real consumer spending may also slow over the next 1-2 years. This suggests that corporate-profit (S&P 500) earnings growth will also suffer, and raises a strong possibility that the stock market may be headed for another decline.
Sources: Real personal consumption expenditures: Bureau of Economic Analysis S&P 500 operating earnings per share: Standard & Poors
Updated: 10/3/15