The Street has officially cried recession; at least part of The Street has. According to survey done by The Wall Street Journal, 28% of economists are predicting a recession in the next 12 months. In the same survey performed just a month ago, the results came in at only 10%. Additionally, Bank of America and Deutsche Bank have projected a recession in 2023; and economists at Goldman Sachs say there’s a 38% chance of a recession in the next 24 months.
In even more discomforting news, their recession cries are not unwarranted. From a solely technical standpoint, the first catalyst for decreased economic growth happened on the 14th of March, when the S&P stock market index fell into a Death Cross (pictured below). Death Crosses occur when the 50-day moving average of a stock, index, ETF, or commodity, etc. crosses below the 200-day moving average. Many technical experts use this indicator to identify weakness or an imminent bearish trend in the underlying. For instance, the last 40 times we’ve seen this death cross on the SPX, the S&P experienced a drawdown all but 3 times (1933, 1980, & 1999) with the average downturn of 12.57%.
The second technical indicator happened on the first of April, when the U.S. 2-year treasury yields inverted with the U.S. 10-year treasury yields (pictured below). Like anything else, treasury yields are driven by supply and demand; and like all other bonds, yields go up when the price of the underlying bond goes down. In other words, investor demand for the U.S. 10-year has far exceeded the demand for the U.S. 2-year, so much so that it drove the yield for the 2-year above the yield for the 10-year. Since the 1960’s the 2/10 year inversion has accurately signaled a recession in the next 6-18 months…except for the times in which the Federal Reserve stepped in and defused it.
Speaking of the Federal Reserve, they also have $9 trillion balance sheet to unwind; which brings us to the non-technical recession catalyst. Starting in May, the Fed will likely approve the $95 billion a month ($60b in treasuries; $35b in MBS’s) plan to reduce their balance sheet. This means selling their fixed income securities back to the parties they bought it from, resulting in a reduction of money supply. Additionally, the projected rate hikes throughout the year will also theoretically depress the money supply and velocity; although the flip side is that it encourages borrowers to take on loans now before the cost to borrow gets even more expensive.
Either way, the hawkish tone that the Fed has committed to is very contractionary; which now begs the question: all this to combat inflation? They guess so…
Cheers,
P.S. other recession catalysts that I left out: geopolitical tensions, supply chain bottlenecks, heavy corporate debt loads
P.P.S. not financial advice, I’ve had a few drams
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