Recession Signals
TL;DR
There are 4 signs that tell me a recession is around the corner.
10Y - 2Y Yield spread - The most reliable indicator of a recession.
Unemployment has met FED’s target.
Inflation is a catalyst for a recession.
The last real recession was 14 years ago.
I’m not suggesting selling all your stocks. On the contrary, I am slowly accumulating stocks of $ZS, $UPST, $NVDA, $AMD. The stock market is forward-looking and it’s slowly pricing in an oncoming recession, which means stocks are getting cheap!
If stocks are already down, what’s the point in telling us a recession is around the corner?
The purpose of sharing my thoughts is to prepare ourselves for what’s coming, by making strategic decisions like avoiding switching to jobs vulnerable to recessions, getting rid of unnecessary assets, preparing emergency cash, etc.
The Yield Curve
The yield curve inversion has correctly predicted the last 10 recessions, including the recent COVID-induced one..
and it looks like it is about to invert again.
The logic behind this phenomenon?
The fed controls the short-term treasury yields. When the economy is healthy, unemployment is low, and inflation is running hot, the fed sees this as a opportunistic time to squeeze the economy a little.
They achieve this by raising the short-term Treasury yields which entices saving instead of spending. Simultaneously, institutions flock towards safety by buying long-term Treasury bonds, pushing long-term Treasury yields down.
Unemployment
The fed targets normal unemployment rate @ 4.1%.
Right now, the unemployment rate has reached their target which means they can afford to tighten monetary policy. It becomes harder for companies to borrow which leads to budget constraints and manpower reduction.
Source: bls.gov
Inflation
You can already feel it in your daily lives.
Petrol increased from $2.20 to $3.20 in about a month.
Food is at least 20% more expensive everywhere.
Real Estate prices are also up significantly.
When prices increase, people will naturally spend less.
Some examples:
Choosing public transport or even bicycles over cars.
Eating less expensive meals.
Travel to less expensive countries.
This affects the earnings of businesses as well as their suppliers which will ripple throughout the economy.
Recessions normally happen once every 10 years
Finally, it has been 14 years since the last real recession. The COVID-induced recession doesn’t count because we were bailed out by the extreme money printing by the FED. If the normal recession cycle is 10 years, then we are way overdue which increases the probability of one occurring soon.
Conclusion
Based on the above factors discussed, the probability of a recession seems pretty high though I cannot provide a % number.
Nevertheless, it is only prudent to position ourselves financially and make strategic decisions that enables us to weather the storm if and when it occurs.