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Baltic Dry Index Myth: Sharp Drops Always Indicate a Coming Recession

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It's possible that the BDI is telling us something this time. On the other hand, it wasn't saying much in 2004, 2005, 2010 or 2011 about an imminent recession, either.

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Editor's Note: The following was posted in real time on our premium Buzz & Banter (click for a free trial).

Every once in a while we are flooded with questions about an indicator that is rarely spoken about, and we use the concept of the popular Discovery channel show Mythbusters and test if it is meaningful. The current 65% drop in the Baltic Dry Index that measures shipping rates is one such example. Many are fearful (especially given today's disappointing GDP report) that the sharp decline since October 2011 "is telling us" the economy is about to head into recession. While anything could happen, history suggests not using the BDI as your test. Let's take a look…

Myth to Test: The Baltic Dry Index is down 65% since the October 14 peak and is warning us of a sharp slowing in global economic growth.

Reality: There have been six prior occurrences in a non-recession environment of the BDI suffering a gut-wrenching drop similar to the current drop (see the chart below). There have been two per year over the past two years, with the most recent being 59% and 65%, respectively. We certainly cannot claim to be experts in this index, and maybe this time "it is telling us something." On the other hand, it wasn't saying much in 2004, 2005, 2010 or 2011 about an imminent recession, either. The market is due to take a breather, but as highlighted in our most recent Collins Stewart January 2012 Picture Book, there are few signs of recession or a significant drop in equities over the intermediate-term.


Click to enlarge

Editor's Note: This article was written by Collins Stewart LLC's Chief Equity Strategist and Director of US Equity Research Tony Dwyer.

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No positions in stocks mentioned.
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