It was predicted that a recession might be coming since mid-2022. The yield curve, we know, is one of the most robust recession predictors. It has already signaled a recession in 2023. In contrast, the US stocks measured by the S&P 500 are up from the lows of last October, seemingly rejecting recession fears. But, fixed-income markets have seen the Fed cutting rates by the summer. This can be a reaction to the US recession.
Forbes reported that the recessionary evidence, especially from fixed-income markets, is increasing. The 10-year treasury yield has been below the 2-year yield since last July. That is known as an inverted yield curve, signaling a recession.
Upon that, fixed-income markets now see a 9 in 10 chance that the Fed will cut rates by September 2023. That is what the Federal Reserve has repeatedly said that they will not do on their present forecasts. But a recession can cause it to happen.
The scenario at the stock market
However, now, the stock market has shown some optimism. The S&P 500 has gone up 7 percent year-to-date. And the market shrugged off contagion worries due to the recent banking issues. Especially, the tech stocks have rallied.
The more defensive sectors like utilities, healthcare, and consumer goods lagged in 2023. This suggested that the stock market might be taking a ‘risk on’ position and is perhaps less afraid about the economy.
The stock market, here, is a leading indicator of the business cycle. The stocks may see a recession but are, at the present, looking past it to grow ahead and factoring in the lower discount rates that the recession may bring as the interest rates decline. Also, we should understand that the U.S. stock market is relatively global.
What to expect next
Monitoring unemployment data can be the key to assessment. Though the yield curve is a long-term forecaster of recessions, it is less precise to signal when a recession begins. Unemployment rates may offer more accurate recession timing. Unemployment edged up in February. It suggested that a recession could be near. And last year, two similar monthly unemployment spikes both proved false alarms.
When we see a continuous rise in unemployment from the low levels of 2022, it may be a clear sign that a recession has started.
Claudia Sahm (American economist) estimated that a sustained 0.5 percent increase in the unemployment rate from one-year lows is enough to trigger a recession. Unemployment rose 0.2 percent from January to February in 2023, so a recession is not unlikely.
Currently, the jobs market performed better than expected in the year 2022, and it can perform better again. However, fixed-income markets suggest a 2023 recession is on its way. But, Stock markets do not necessarily share the same view.
Is the stock market forward-looking?
The Motley Fool website analyzed and reported on April 3, 2023, that the forward-looking character of the market usually works both ways. The S&P 500 went down before the GDP bottomed in each recession in the past fifty years. However, this excludes the recession that followed the dot-com crash. That means the investors who had waited for the proof that the economy was improving had missed a part of the stock market’s rebound. Missing only a few good days may provide lasting damage to a portfolio. As a result, investors should not let recession worries keep them out of the stock market.