Author Topic: The market has predicted 13 of the last 7 recessions (seriously!)  (Read 1676 times)

FireLane

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This article from the Atlantic, talking about the stock market volatility this year, had an interesting tidbit:

https://www.theatlantic.com/ideas/archive/2022/12/stock-market-inflation-interest-rates-recession/672612/

The Fed is hiking interest rates to fight inflation, and that often causes a recession. So, even though the U.S. economy is pretty strong right now - unemployment at 3.7%, household finances and corporate balance sheets both relatively good - day-traders are selling stock in anticipation of a recession next year.

That's given rise to a bear market in which speculative growth stocks, like Tesla and tech in general, have been hit the hardest.

But:

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To look at the stock market’s performance this year and conclude that we’re definitely headed for a sustained economic downturn would therefore be a mistake. After all, the economist Paul Samuelson’s famous 1966 saying that the stock market had predicted nine of the previous five recessions was backed up by a 2016 CNBC study, which found that in the postwar era, of 13 bear markets—usually defined as a sustained period of a 20 percent market decline—only seven were followed within 12 months by actual recessions.

Going by this data, even the collective intelligence of the market is a poor predictor of recessions. It's basically as good as a coin flip!

It's still possible that the Fed will pull off a soft landing, and that inflation will subside without there being a recession at all. As always, no one knows what's going to happen, and timing the market almost never works.

MustacheAndaHalf

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Re: The market has predicted 13 of the last 7 recessions (seriously!)
« Reply #1 on: December 30, 2022, 09:09:55 PM »
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... of 13 bear markets—usually defined as a sustained period of a 20 percent market decline—only seven were followed within 12 months by actual recessions.
Going by this data, even the collective intelligence of the market is a poor predictor of recessions. It's basically as good as a coin flip!
You and the author both assume the only thing the market uses to predict recessions is the presence of a bear market.  You are both wrong.

"An inverted Treasury yield curve is one of the most reliable leading indicators of an impending recession"
https://www.investopedia.com/articles/basics/06/invertedyieldcurve.asp

vand

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Re: The market has predicted 13 of the last 7 recessions (seriously!)
« Reply #2 on: December 31, 2022, 02:51:55 AM »
A rather strawman fight being picked, because the stock market's purpose is not to predict recessions, its to allocate capital to businesses.

But howabout a recession predictor where a 40% reading always turns into a recession?

Ladies & Gentlemen I present to you the Official Fed Recession Probability predictior...

https://www.newyorkfed.org/medialibrary/media/research/capital_markets/Prob_Rec.pdf
« Last Edit: December 31, 2022, 03:04:50 AM by vand »

nereo

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Re: The market has predicted 13 of the last 7 recessions (seriously!)
« Reply #3 on: December 31, 2022, 07:42:20 AM »
“… collective intelligence of the market…”


Yeah…

MustacheAndaHalf

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Re: The market has predicted 13 of the last 7 recessions (seriously!)
« Reply #4 on: January 01, 2023, 12:22:10 AM »
A rather strawman fight being picked, because the stock market's purpose is not to predict recessions, its to allocate capital to businesses.
Someone claimed the stock market solely uses bear markets to predict recession, and I refuted that claim directly by showing the inverted yield curve is a strong predictor that was ignored.  Where is there a strawman argument?

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A straw man (sometimes written as strawman) is a form of argument and an informal fallacy of having the impression of refuting an argument, whereas the real subject of the argument was not addressed or refuted, but instead replaced with a false one

Worth pointing out nobody was talking about "the stock market's purpose" before your post.  You're not addressing the contents of this thread at all.

bwall

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Re: The market has predicted 13 of the last 7 recessions (seriously!)
« Reply #5 on: January 02, 2023, 05:44:50 AM »
"An inverted Treasury yield curve is one of the most reliable leading indicators of an impending recession"
https://www.investopedia.com/articles/basics/06/invertedyieldcurve.asp

+1.

Look toward the yield curve for insight as to future recessions.

Every recession in the US was preceded by yield curve inversion although not every yield curve inversion has led to a recession. This is what makes forecasting recessions so difficult.

ChpBstrd

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Re: The market has predicted 13 of the last 7 recessions (seriously!)
« Reply #6 on: January 13, 2023, 03:39:41 PM »
Why not just say "never in modern economic history have interest rates risen 4.5% in a year and a recession not followed."

nereo

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Re: The market has predicted 13 of the last 7 recessions (seriously!)
« Reply #7 on: January 13, 2023, 05:04:46 PM »
Why not just say "never in modern economic history have interest rates risen 4.5% in a year and a recession not followed."

What’s the sample size here though? N=2?

MustacheAndaHalf

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Re: The market has predicted 13 of the last 7 recessions (seriously!)
« Reply #8 on: January 13, 2023, 07:33:08 PM »
Why not just say "never in modern economic history have interest rates risen 4.5% in a year and a recession not followed."
What’s the sample size here though? N=2?
The article author oversimplified in an area they aren't an expert, and so stripped out context and provided their own.  Taking "over 4.5% rates" in isolation is better than just a "bear market", but it does leave out Fed tightening, an inverted yield curve and an oil price shock.

I've heard multiple CNBC/Bloomberg contributors say 7 of 7 Fed tightening cycles lead to recession, where Fed tightening used to mean "open market actions" and now means "quantitative tightening" (QT).  But I don't have any references to back that up, so I avoided mentioning it earlier.  Providing the full context would essentially point to the 1970s-1980s: inflation over 5%, oil price shock, Fed tightening, inverted yield curve.  And per Nereo's point, that leads to asking which part of the context should be stripped away to provide the most accurate context, but enough samples to matter.  I'm not entirely sure.

blue_green_sparks

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Re: The market has predicted 13 of the last 7 recessions (seriously!)
« Reply #9 on: January 13, 2023, 10:58:09 PM »
Just another advantage of being FIRE'd. It's not like I'm going to lose my job or anything. There is nothing as solemn as layoff day in a large cap company, in the middle of a recession. Waiting to get that tap on the shoulder. The guard with some boxes for you, he needs your badge.  Didn't matter how good you were sometimes. We had a rookie engineer who got fired actually show up at the post layoff reassignment meeting. Awkward.

Imanuels

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Re: The market has predicted 13 of the last 7 recessions (seriously!)
« Reply #10 on: January 15, 2023, 04:57:37 AM »
Interestingly, Prof. Harvey himself thinks that this time might be different!
"My yield-curve indicator has gone Code Red. It is 8 for 8 in forecasting recessions since 1968 —with no false alarms. I have reasons to believe, however, that it is flashing a false signal."
https://www.linkedin.com/posts/camharvey_pioneering-yield-curve-economist-sees-us-activity-7016527789398847488-Rgtd?utm_source=share&utm_medium=member_desktop

Quote
"An inverted Treasury yield curve is one of the most reliable leading indicators of an impending recession"
https://www.investopedia.com/articles/basics/06/invertedyieldcurve.asp

MustacheAndaHalf

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Re: The market has predicted 13 of the last 7 recessions (seriously!)
« Reply #11 on: January 15, 2023, 05:34:29 AM »
That article makes a nice contrast to the one starting this thread.  Professor Harvey is an economist who wrote a thesis that yield curve inversions could predict recession, supervised by none other than Eugene Fama himself.

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Campbell Harvey ... His doctoral supervisors were Eugene Fama, Merton Miller, Robert Stambaugh, Wayne Ferson, Shmuel Kandel, and Lars Hansen.
...
Harvey's 1986 thesis showed that information in the term structure of interest rates was linked to future growth of the economy. When short-term rates were higher than long-term rates (an inverted yield curve), recessions followed. In the time since his thesis was published, the yield curve has inverted three times—in 1989, 2000, and 2006—correctly predicting the three recessions of 1990–1991, 2001, and 2007–2009
https://en.wikipedia.org/wiki/Campbell_Harvey
« Last Edit: January 17, 2023, 08:47:07 PM by MustacheAndaHalf »

yachi

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Re: The market has predicted 13 of the last 7 recessions (seriously!)
« Reply #12 on: January 16, 2023, 10:47:14 AM »
That a bear market would occur, but not be followed by a recession is not actually great news for those of us already retired.  When you rely on the markets to support your spending, a bear market reduces the funds you have available.  That is what hits a retiree's pockets.

A recession, in turn hits the pockets of the working man or woman by causing job losses and restructuring from industry to industry.  As such, it often comes accompanied by opportunities for reduced prices to the retiree: home repair and remodeling is likely to be cheaper as unemployment goes up, struggling working neighbors who've overleveraged themselves may take to selling vacation cabins, leading to a reduction in prices for vacation cabins.  Working families who can no longer afford car payments can lead to additional cars available for sale, likely reducing prices.


UnleashHell

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Re: The market has predicted 13 of the last 7 recessions (seriously!)
« Reply #13 on: January 17, 2023, 07:55:44 AM »
- day-traders are selling stock in anticipation of a recession next year.

.

day traders are suddenly looking long term?????


nah...

 

Wow, a phone plan for fifteen bucks!