You know what “they” say: past performance does not guarantee future results.
What we can say, however, is that some statistical measures are better at predicting the future than others that make investors’ lives easier.
And one such metric that's been capturing the attention of economists and investors for over 60 years is the New York Fed's recession probability tool.
Writer Sean Williams explains this indicator as the difference in yields between the 3-month and 10-year Treasury bonds (the “spread”) to forecast how likely it is that a recession will come to pass in the coming year.
A normal yield curve is sloped upward and to the right, showing bonds with longer maturities (10-20-30 years) with higher yields than bonds scheduled to mature sooner – kind of what we typically see in a healthy economy.
When troubles in the economy stir up, though, the yield curve tends to become inverted – that is, shorter-term bonds have higher yields than longer-term bonds.
A yield-curve inversion doesn't guarantee a forthcoming recession. But Williams (and others before him) note that every recession after World War II has been preceded by a yield-curve inversion.
According to the latest NY Fed's recession-probability indicator, there's a 68.22% chance the country will enter a recession over the next 12 months.
Williams notes that's the highest probability of a recession occurring in the next 12 months in over 40 years.
“Not coincidentally,” he says, “we're also witnessing the largest yield-curve inversion between the 3-month and 10-year note in more than four decades.
Since 1959, there have been eight instances when the NY Fed's recession-forecasting tool has exceeded a 40% probability of an economic downturn.
With the exception of October 1966, every other previous time a reading has been above 40% the economy has dipped into recession – that's 57 years without a miss.
One of the reason recessions matter is because no bear market has bottomed since World War II before the National Bureau of Economic Research has officially declared a recession.
By Dave Allen for Discount Gold & Silver
You know what “they” say: past performance does not guarantee future results.
What we can say, however, is that some statistical measures are better at predicting the future than others that make investors’ lives easier.
And one such metric that's been capturing the attention of economists and investors for over 60 years is the New York Fed's recession probability tool.
Writer Sean Williams explains this indicator as the difference in yields between the 3-month and 10-year Treasury bonds (the “spread”) to forecast how likely it is that a recession will come to pass in the coming year.
A normal yield curve is sloped upward and to the right, showing bonds with longer maturities (10-20-30 years) with higher yields than bonds scheduled to mature sooner – kind of what we typically see in a healthy economy.
When troubles in the economy stir up, though, the yield curve tends to become inverted – that is, shorter-term bonds have higher yields than longer-term bonds.
A yield-curve inversion doesn't guarantee a forthcoming recession. But Williams (and others before him) note that every recession after World War II has been preceded by a yield-curve inversion.
According to the latest NY Fed's recession-probability indicator, there's a 68.22% chance the country will enter a recession over the next 12 months.
Williams notes that's the highest probability of a recession occurring in the next 12 months in over 40 years.
“Not coincidentally,” he says, “we're also witnessing the largest yield-curve inversion between the 3-month and 10-year note in more than four decades.
Since 1959, there have been eight instances when the NY Fed's recession-forecasting tool has exceeded a 40% probability of an economic downturn.
With the exception of October 1966, every other previous time a reading has been above 40% the economy has dipped into recession – that's 57 years without a miss.
One of the reason recessions matter is because no bear market has bottomed since World War II before the National Bureau of Economic Research has officially declared a recession.
In other words, Williams warns, the message from the NY Fed tool is that the Dow Jones, S&P 500, and Nasdaq stock market indexes may not have seen their bear market lows yet.
Watch Falling M2 and Tighter Bank Lending, Too
Remember, too, that the recession-probability indicator is just one of a several metrics that signal potential trouble for Wall Street and Main Street.
Williams points to one of them, money supply, which he notes “has been doing something truly historic on both sides of the aisle.”
The broader M2 money supply, which accounts for everything in M1 (cash bills, coins, and traveler's checks) and adds money market funds, savings accounts, and certificates of deposit below $100,000, skyrocketed by a record 26% annualized during the pandemic.
As of March 2023, M2 money supply had declined 4.1% year-over-year, which marks its largest drop in 90 years.
Although, as Williams explains, it's possible the decline in M2 “is completely benign, given how much the money supply had expanded during the pandemic,” the precedent for M2 declines of at least 2% isn't rosy.”
In the four previous times that M2 has dropped by at least 2%, three recessions and a deposit panic ensued.
Even though two of those events occurred before the Fed was even created – and the other two happened around 100 years ago – declining money supply has generally been an alarming sign.
Another indicator that Williams says is worth keeping an eye on is lending by U.S. banks.
With a couple of exceptions, the total amount of loans and leases outstanding from commercial banks has continued to climb.
There are, however, four times Williams notes when bank lending retraced by at least 1.5% since the start of 1973.
In three of those instances, the S&P 500 lost around half of its value; the fourth just occurred in the past few weeks.
Even the Fed is sounding an alarm. When the meeting minutes were released from the Fed’s FOMC March meeting, they included a warning that a "mild recession" was forecast for "later this year."
Again, no forecasting tool is perfect. But historically speaking, U.S. stocks suffered most of their bear market losses after, not before, a recession has been declared.
If you’re thinking that it’s time to insure yourself and family against the high probability of a coming recession and its many impacts, you would be right.