Dec 12, 2022

A Nearly Perfect Recession Indicator Flashes Red

Weekly Market Commentary

The Federal Reserve, interest rates, and inflation have been big topics this year. Chatter about a possible recession has been part of the conversation, too.

A few weeks ago, we looked at the enormous amount of stimulus cash that remains in savings, which is cash that could support spending and delay the start of a recession. It’s an analysis that went against the grain of the consensus. But the stash of cash could eventually dry up.

Let’s look at one indicator that has a nearly perfect record of forecasting recessions.

An inversion of the 10-year Treasury yield and the 3-month T-bill foreshadowed eight of the last nine recessions.

We must travel all the way back to 1966, when an inversion presaged a sharp slowdown in economic growth, but a recession did not ensue.

What is an inverted yield curve? An inversion occurs when longer-dated maturities yield less than shorter-dated maturities. Today, the 10-year Treasury yields less than the 3-month T-bill, as highlighted above in the table of returns.

It doesn’t happen often (recessions don’t happen often), but it suggests that investors believe short-term rates are headed lower. Maybe not today, but weaker economic conditions would be expected to force the Fed to cut rates.

When that has happened in the past, short yields fall faster than longer yields, and the curve normalizes. Note the graphic below. It illustrates the predictive ability of the yield curve.

While it has been a reliable predictor, it has not done a good job of pinpointing the start of a recession.

An inversion occurred anywhere from 5 months to 16 months prior to the onset of a recession (the 1973-75 and 2008-09 recessions, respectively). The average time span between an inversion and the start of a recession is 10 months.

There were no instances of a recession occurring without a yield curve inversion. The curve inverted in October.

Reproduction Prohibited without Express Permission. Copyright FDP Wealth Management. All rights reserved. Advisory Services offered through FDP Wealth Management, LLC, a state Registered Investment Advisor. Securities offered through Valmark Securities, Inc., Member FINRA/SIPC | 130 Springside Drive Suite 300 Akron, OH 44333-2431 | 800.765.5201. FDP Wealth Management, LLC is a separate entity from Valmark Securities, Inc. If you do not want to receive further editions of this weekly newsletter, please contact me at (949) 855-4337 or e-mail me at or write me at 8841 Research Drive, Suite 100, Irvine, CA 92618. FDP Wealth Management, LLC, Valmark Securities, Inc. and their representatives do not offer tax or legal advice. You should consult your tax or legal professional regarding your individual circumstances. Indices are unmanaged and cannot be invested directly in. Past performance is not a guarantee of future results.


How Do Investors Spell Relief?

Investors celebrated an ‘in line with expectations’ CPI that suggested the rate of inflation isn’t accelerating. It’s a small win, but it was enough to send the three major market indexes, the Dow, the Nasdaq, and the S&P 500 to new highs.

An Annual Ritual at the Gas Pump

You’re right if you have this nagging feeling that gas prices rise in the spring. As the graphic illustrates, on average prices rise through Memorial Day, plateau over the summer, and slip in the fall. This year is no exception, as prices echo the seasonal pattern.

Rate Cuts Still on the Table, Timing Less Certain

We often discuss the Federal Reserve and interest rates because both greatly impact investors. For starters, changes in interest rates have a significant impact on stock prices and income earned on savings. Sharply higher rates in 2022 pushed equities into a bear market.

Just Do It

That ubiquitous phrase from one of America’s most extensive athletic footwear and apparel makers seems to have been adopted by most American shoppers. The U.S. Census Bureau reported last week that retail sales jumped 0.7% in March, following a strong 0.9% rise in February.

The Road to Lower Inflation Takes a Detour

The rate of inflation is accelerating. That’s not how we hoped to start this week’s Insights. Take a moment and review Figure 1. The 4-month moving average has broken out of its long-term downward trend (red-dashed lines). On a monthly basis, prices bottomed in June and began to gradually turn higher. The upward trajectory picked up in January.