Is the economy on the verge of a crash? Let’s examine what the facts say.
Fear that a market-punishing recession is right around the corner seems ubiquitous. Headlines, cable news chyrons, social media, talking heads, investment analysts and politicians solemnly convey the following composite message:
Monetary actions by the Federal Reserve Board will plunge the nation into recession this year or early next. This fate is confirmed in blinking neon by the trends in yields of Treasury bonds of different maturities, known as the yield curve. The recession will push the already-declining stock market much lower, savaging returns of millions of Americans investing for retirement. Inflation, at a 40-year high, is wrecking our economy, and will continue indefinitely. The war in Ukraine will grind the market down even further.
This picture of financial conditions is the bleakest since the financial crisis of 2008 (an actual crisis). Astonishingly, these prognosticators seem quite certain about something that’s impossible to predict with certainty. At the very least, some of their predictions lack nuance and qualification. At the worst, they misguidedly rely on analysis that’s flat-out wrong, hyped or distorted.
Sure, economists cover themselves with a lot of if-then statements. But the general tone of the media and some renowned investors these days is that a recession is definitely coming soon—no question about it—and it will push the market far below current levels. The message is clear: Financial apocalypse is at our doorstep.
Sure, a recession is coming. Recessions are like rain: One is always coming. The question is: When? Doomsayers seem impervious to various data indicating that a recession before 2024 (if even then) is unlikely. They dismiss various indications that regardless of what happens with the economy, the market won’t necessarily tank. But not all bear markets occur with recessions and not all bull markets occur with great economies.
Here are some points that challenge the basis for the current hysteria:
The obsession with the direction of Treasury-yield curves is based partly on error, partly on assumption. National media, always looking for simplicity, obsessively monitor the slope of the curve of yields of the two-year and 10-year Treasury bills, as if this is a sure-fire recession indicator. They cover the flattening of this curve as though it were the horrifying descent of the suspended swinging blade in Edgar Allen Poe’s “The Pit and Pendulum,” threatening to disembowel the economy.
Unfortunately, they’re looking at the the wrong curve. The more predictive curve is the three-month/10-year, which is currently steepening, suggesting no approaching recession. The inferiority of the two-year/10-year curve as a recession indicator is a matter of historical record. This was clearly demonstrated again in 2018: After an angst-filled summer that year with this curve flattening, no recession ensued. And regardless, recession forecasting should rely on a myriad of data, not just Treasury-yield curves in isolation.
So powerful is the current sense of doom that investor sentiment stemming from it may be pushing down the market a little in a bit of a fait accompli. To the extent that this is happening, when the market eventually rises, it could spring back all the more after these fears diminish. And likely pushing it up from there would be existing long-term forces, including the digital revolution, which has not only driven the growth of tech stocks in recent decades but the overall market as well.
David Sheaff Gilreath, a Certified Financial Planner™, is a 40-year veteran of the financial services industry. He is a partner and chief investment officer of Sheaff Brock Investment Advisors LLC, a portfolio management company for individual investors, and Innovative Portfolios LLC, an institutional money management firm. Based in Indianapolis, the firms manage nearly $1.4 billion in assets nationwide.