There have been ways of predicting market movements in the past that, kept secret by their discoverers, were later turned into trading empires before they stopped working. But there are no ways of predicting future market movements that both (A) work and (B) are on the front page of Hacker News.
2. The NBER defines a recession as “a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales.” It has nothing to do with the stock market.
This is not quite true. 2s10s curve inversion is commonly discussed, but 3m UST bill vs 10y UST note has far greater predictive power  -- and this indicator does not exist for all large economies. BoJ and ECB factor in curve inversions already, which diminishes their predictive power.
Additionally, some have argued that the US tax policy changes have diminished the signal from the curve (companies repatriating cash tend to hold it in short dated tenors, making the curve steeper than it would otherwise be). Finally, there's argument over whether yield curve inversions are causative or indicative of recession in the US.
You're equating the behavior of the stock market with a recession, when they're not the same thing. The stock market is correlated, yes, and people talk about it because it can be a leading indicator of the BLS data, but it's not how we define a recession. You can have negative GDP growth with a rise in the stock market, and you can have a dip in the stock market along with positive GDP growth.
The dilemma you propose relies upon a conflation of a prediction's accuracy with the prediction's adoption on a universal scale.
You can see the flaw in that logic in this exchange here. Your prediction on how a market would behave given a perfect predictor, if accurate, has not garnered my belief, so the universality of it's adoption has failed regardless of its validity.
Alright, now imagine the Stock Market sells off on fears of an upcoming recession. What do you do? Well, you may cut investments in that new plant you were planning on building or put a freeze on hiring.
Now imagine, that your competitors, suppliers, and customers hear about this. This type of stuff starts to feed on itself then forecasts are lowered. This becomes self-reinforcing.
This is a simple example of how a sell-off in stocks can cause a recession.
If anything is going to trigger a recession I would put my money on corporate debt, so many companies are loaded with debt that will rear it's ugly head the moment any slowdown in growth is on the horizon. That will trigger lower spending, job cuts, and other means that would bring us into recession.
Roughly the same predictive power as flipping a coin isn't what I'd call a "fair predictor".
Here is a graph of 10-year minus 2-year, a yield inversion is whenever the graph dips below 0%.
The yield inversion predictor is incredibly powerful.
EDIT: Part of the reason for yield inversions to happen is that a large number of people are buying long-term bonds, because they think a bear market will exist. Its better to hold onto a 10-year bond through a recession, because short-term rates will drop during a recession.
We don't quite have a 10-year inversion yet, but we have a 7-year inversion. 5-year yields less than 1-year at the moment. So investors prefer making less money on a 5-year (to guarantee a stable interest rate), rather than 1-year.
That means a large number of people are predicting a recession.
I'll suggest better predictors of the health of the economy would be 1) Record domestic manufacturing output, 2) Most energy security in history (US is now a net exporter of oil), and 3) lowest unemployment since 1969. The US Economy is firing on all cylinders and I wouldn't be surprised if a strong economy runs for another 2-5 years. This is not all that unusual, since the US is returning to a historical average GDP growth rate of 3-4% after an abysmal decade of 1-2% growth.
What was the US's unemployment in 2007, before the crash? It was 5%.
Recessions CAUSE unemployment. You've got cause-and-effect backwards. First comes recession, THEN comes unemployment. Usually, unemployment happens as the recession recovers.
In 2009, unemployment was 10%. But guess what? The recession was over, and 2010 was one of the best recoveries of all time.
> 1) Record domestic manufacturing output
That's practically a tautology. When US GDP shrinks (and a large portion of GDP is manufacturing), you have the DEFINITION of a recession.
You're looking at historical indicators of a Recession. IE: When everyone is unemployed and the factories are closed, we can look back and say "Yeah, a recession happened 6 months ago". But there's literally NO predictive power in those two attributes.
> 2) Most energy security in history (US is now a net exporter of oil)
While this is likely good policy, it doesn't seem to be indicative of recessions or not. Case in point: we've grown incredibly in the 1950s when we were importing oil. The 80s and 90s were also built on top of foreign imports, but that didn't stop the economic boom times.
If you are trying to decide wether to dump all your stocks into treasury bills in the next 90 days, but before an actual recessionary drop, then yes it's a poor indicator (and likely there is no indicator to answer this question).
But if you're looking at a long term allocation of your assets, or a corporation trying to plan investments long term then maybe it's relevant.
It's hard to look at the long run GDP rate (from the50's on) and think we're going to return to past rates until we fix our inequality problem. They've been inversely related for multiple decades now.
Why do you say that?
Trump's Tax Cuts were written into law in 2017, but only these months (tax season 2019) is when people are fully understanding the scope of the tax law, as it hits our pocketbooks.
A surefire predictor within 2-years or so is good for policymakers, but probably bad for traders.
> (currently it is 0.18 in Feb 2018)
Note that the 1-year is inverted with the 2-year. So while 10year-2year is 0.18, the 10year-1year is 0.1.
The lower-end of the curve is ALREADY inverted. But that's not "the indicator", the 10-year is the indicator that is tracked. Still, seeing the curve invert between 1-year and 5-years is worrysome to me.
This is a less reliable indicator: but when the lower end of the curve inverts, usually the higher end inverts soon afterwards as well.
We've definitely dipped on the 5-year and 7-year. But I'm not aware of any inversion on the 10-year (even an intra-day one). Or was it on the Global Bond market? (I think I recall one story about the global bond market becoming inverted...)
Hmmm... do you have a citation by any chance? I'm definitely interested if you can remember where you saw that data, for the full details of the situation.
If some one keeps claiming recession they happen will be right at some point.
The yield inversion is ALWAYS within 3-years of a recession. That's pretty darn good in a world where candlesticks and dead cat bounces are your "technical" indicators...
There's even good logic for why the yield inversion is predictive of recessions: because when people buy 10-years (even if the 10-year is a lower-yield than 2-years), it means that people expect the next 2-years to suck.
So its better to lock into a long-term 10-year yield, than to hold onto a better yield for only 2-years.
Note: The 10-year has NOT inverted yet. But it is only 0.10% away from inverting.
But the point I'm trying to make is that we ALL know that indicators in economics are kinda bad. But of all the bad indicators economists have, the Yield Inversion is one of the most powerful, predictive, and correct indicators in existance.
That indicator alone should give people pause. Well, when it happens. The 10-year has NOT inverted yet, but its darn close to inverting.
The 5 times the 10-year yield inverted, were followed by 5 recessions: 1980, 1984, 1991, 2001, and 2008. That's 5 for 5.
And there are other studies that go back 100+ years with similar conclusions.
So it isn't a perfect indicator over 100+ years, but its still a damned good one. Furthermore, there are solid fundamental economic principles and calculations which back up the thesis. Yield Curve seems to predict GDP (or more specifically: the market participants predict a recession, which causes the market participants to buy/sell bonds in a specific way to make an inverted yield curve).
This isn't some hokey theory positioned by bear websites like zerohedge. This yield-curve inversion is a fundamental attribute taught in major schools of modern economics.
> The historical record does not show this connection to be only a post-WWII phenomenon. The yield curve inverted between June 1920 and March 1921 and again between January 1928 and November 1929.7 Data from the 19th century are incomplete and do not easily lend themselves to analysis.8 Nevertheless, support for the thesis of the
yield curve as a predictor of business cycles can be traced as far back as the mid-1800s.9
We're looking at a pattern that has been relatively reliable since the mid-1800s.
Inverted yield curves STRONGLY (but not perfectly) predicts recessions over a period of ~150 years, and perfectly predicted recessions of the last 40 years. This is one of the best indicators of all of economic theory.
The problem in finance is that early (or late) is often no better than wrong.
If you are setting policy, it takes years for tax-policies to have an effect on the economy. We can change the tax law today, but it won't really come into effect until next year, or the year afterwards.
On the scale of policy changes, a worst-case 2-year lag on an indicator is perfectly acceptable.
Say there are ten "events" that have had recessions follow them (or not). Each of these events happened 10 times.
For the first type of a event, a recession happened just once afterwards.
For the second type of event, a recession happened twice.
For the third type of event, a recession happened three times
The third, a recession happened three times.
The fourth, a recession happened four out of ten times.
The fifth, a recession happened five times.
This has very little to do with flipping a coin, and much more to do with deciding the right time to pay attention.
Half a chance of getting hit by a car is not the same as "flipping a coin."
Generally, throughout the past hundred years or so, there has been much less than a 50% chance to enter a recession. I don't know the numbers, but for any given year, it could be 10%. If there is now a 50% chance, isn't that a 5 fold increase in risk?
Of course the U.S. is - every day we are one day closer to the next recession. It's that nobody knows when that day is. A lot can happen between now and "that day".
The media loves to point fingers at specific individuals/organizations that are ostensibly responsible for each recession, but there's no known way to completely dampen the oscillations without deep-sixing the economy.
The article basically says that they had people study past recessions and therefore the markers are there, but things in the real world don’t work like this at all. They say that the tax cuts extended the bull run for two years but now it’s over, as if they are 100% sure.
Fidelity who, I guess, sponsored the study should follow its own advice that they give their customers “Past performance does not guarantee future results”.
Therefore I just feel these people are shorting the market and trying to move things in their preferred direction.
However, in reality no one knows what will happen next and no Model can tell us. There are so many variables at play right now in our modern economy and saying that there will be a recession in the future is like saying everyone has to die at some point.
During the dot com bust in 2000, my local job market for developers full of just regular companies writing internal apps wasn’t affected at all. The company I worked for in the bill pay industry, kept humming along.
During the 2008 recession things were a lot crazier until 2011. The investors weren’t willing to invest in our pivot from writing software for ruggedized Windows Mobile/Windows CE devices for large companies to smart phones.
I would think that companies working in the health care industry would still be attractive.
This is how recession and depression are defined, when gdp simply isnt growing a fraction of a percent quarter over quarter. Is this really a proxy to give insight into everything effecting the general population? The words recession and depression are loaded with so much more than what they actually track, I think just saying them slows down the business spending and lending facilities more than the actual trend of printing slightly lower gdp numbers per quarter.
Over the past year or so, each of my friends from a broad swath of industries say their company is going through layoffs. Almost across the board, everything from marketing to engineering.
"Professional forecasters see economic growth easing to 2.4 percent in 2019." "The unemployment rate is forecast to average 3.6 percent in the fourth quarter of 2019, down slightly from four quarters earlier." : https://www.stlouisfed.org/publications/regional-economist/f...
Not a recession.
Higher wages are a good thing.
From Brookings : "Real median household income grew roughly 1.6 percent in 2018"
Median household income : $60K . $60K * 0.016 =$960.
Removing those who found a job, we get back to the lower 1% number. And a big part of that is people just working longer hours.
Or the US already suffered a mild recession in 2015 and the recent higher growth is a bounce out of that.
S&P 500 corporate profits contracted for four straight quarters from mid 2015 to mid 2016. Sales contracted for six straight quarters.
From July 2015, to November 2016, manufacturing employment contracted slightly (essentially was flat). Manufacturing employment has exploded higher since that month.
The U6 unemployment rate was stuck between 10% and 9.6% between Sept 2015 and Oct 2016.
The civilian labor force participation rate for 25-54 year olds (the single most important participation rate), was fairly stable from January 2013 until mid 2015 (after finding a new general floor post great recession), and then suddenly plunked to a new post great recession low of 80.5% in July 2015. It has been setting higher lows and higher highs ever since that drop.
Consumer confidence, which had been rising persistently for years post great recession, stopped going up and then declined from early 2015 through early 2016.
The S&P 500 index was near a peak in May 2015 at around 2134, then proceeded to go nowhere for a year to ~June 20 2016 when it was at 2032. During that weak year, it hit a low of around 1810 (~15% decline).
The small business confidence index tanked from the first quarter of 2015, until early to mid 2016.
The markit US manufacturing PMI began tanking from a high in mid 2014, until it bottomed out in the second quarter of 2016.
The consumer price index had been rising for years post great recession, stopped rising in mid 2014, flattened out until Oct 2014, plunked lower until Jun 2015, then proceeded to go nowhere for another nine months. In net the consumer price index went no higher from Jun 2014 until Mar 2016. The price index then resumed climbing after Mar 2016. That ~20 month dead spot was the longest post great recession.
In 3Q15 GDP growth dropped dramatically from the prior five quarters, to 1% (3Q14 was 4.9% by comparison). 4Q15 GDP growth dropped further to 0.4% (4Q14 was 1.9%). 1Q16 was 1.5% (1Q15 was 3.3%).
If you've got 1% and 0.4% quarterly growth back to back, with a near zero fed rate, what you've got is a recession.
There are countless more data points that indicate the US suffered a mild recession at some point over that year.
No. If you've got two quarters back to back with negative growth, then you've got a recession. That's literally the definition.