Markets fret over US recession

Stock markets have become jittery again. Some profit-taking isn’t surprising, given the big gains over the past two months, but it’s also clear investors remain nervous about whether the US will fall into recession.

An inverted yield curve is generally seen as the best recessionary indicator. Currently, the problem isn’t just that the spread between two- and 10-year treasury bond yields is inverted – it’s that the spread is the widest since 1981, cautions Datatrek Research.

Bulls might retort that the Federal Reserve’s recession probability model, which is partly based on the yield curve, estimates recession odds of just 38 per cent in the next year. However, Datatrek found 11 previous instances where the Fed’s recession model exceeded 30 per cent. In all but two cases, the economy was already in recession or fell into one over the coming year.

Of course, many argue a mild recession is already priced in. That said, TS Lombard data show no bear market has ever ended before the associated recession began. Indeed, the average bear market ended nine months after the recession started, notes the Carson Group’s Ryan Detrick. “Is a recession coming?” asks Detrick. “That’s the big question.”