Never Wrong in 57 Years: What This Amazing Tool Says About Stocks Next!

Decoding the U.S. Economic Outlook with a 57-Year-Old Predictor

Hello Stock Traders,

Today, we’re about to explore a tool that’s been predicting recessions with the accuracy of a seasoned meteorologist for 57 years!

First things first: the stock market is like the superstar of the investment world. Over the long run, it’s like the reliable friend who always shows up, outshining bonds, gold, oil, housing, and pretty much any other asset class.

But when you look at the shorter term, the stock market behaves more like a mood ring, changing colors at the drop of a hat. Since the start of this decade, the Dow Jones, S&P 500, and Nasdaq have been switching between bear and bull markets like they can’t decide on a favorite ice cream flavor.

Now, here’s where our trusty tool comes into play. The Federal Reserve Bank of New York’s recession probability indicator has been the crystal ball of the financial universe. It’s like a financial weather vane, measuring the wind direction of the economy.

This tool looks at the difference in yield between 10-year Treasury bonds and 3-month Treasury bills. Normally, you’d expect long-term investments to yield more than short-term ones. But when this flips – an inversion – it’s like the financial world’s version of a storm warning.

Interestingly, every U.S. recession since World War II has been foreshadowed by this yield-curve inversion. It’s like the ultimate predictor of economic rainy days. As of now, this tool is hinting at a 51.84% chance of a recession by November 2024. It’s not a guarantee, but more like a very educated guess.

Here’s a quirky fact: the NY Fed’s tool considers a 32% probability as the tipping point. Since 1966, whenever this model has crossed that threshold, a recession has followed without fail. It’s like having a secret recipe for predicting economic downturns.

But remember, even the best tools aren’t perfect. Back in October 1966, it predicted a recession that never happened. It goes to show that in the world of stocks, there’s no such thing as a crystal ball. However, if history repeats itself and we do hit a recession, it could spell a temporary gloom for stocks.

Yet, there’s a silver lining. Recessions, while daunting, are often short-lived. Since WWII, most of them didn’t even celebrate their first birthday. And what follows? Usually, economic expansions that last for years, sometimes even longer than a decade. These are the golden eras that drive corporate growth and push stock markets to new heights.

Data from Bespoke Investment Group backs this up with a touch of optimism. They’ve looked at every bull and bear market in the S&P 500 since the Great Depression. On average, bear markets lasted about 9.5 months, while bull markets enjoyed a much longer lifespan of nearly three years.

This pattern tells us that optimism and patience are key in the stock market. If a recession or bear market hits in 2024, it could actually be a golden opportunity for investors to grab high-quality stocks at discounted prices. It’s like finding designer brands on sale – you know they’re worth it, and now they’re even more attainable.

The stock market’s ups and downs might seem daunting, but with a historical perspective and a dash of optimism, they’re more like the natural ebb and flow of an ever-changing, yet ultimately rewarding landscape. So, keep an eye on those economic indicators, but also remember that patience and long-term thinking are your best allies in navigating the dynamic world of stocks!

–James

Up next: In this insightful piece, we look at JPMorgan Asset Management’s cautious outlook for 2024, highlighting their skepticism about a potential stock market surge amidst looming recession concerns.

UBS’s Take on Wall Street’s 4-Year Low in Fear: A Sign of Overconfidence?

Alright, let’s dive into what feels like a financial detective story: the great debate over whether stocks will skyrocket or not in 2024, especially with the word ‘recession’ still floating around. JPMorgan Asset Management is basically telling investors, “Hold your horses, don’t start celebrating just yet,” in a 2024 outlook that’s less sunny than what other Wall Street folks are saying.

The JPMorgan team, led by Karen Ward, points out that we’re not out of the woods yet regarding a potential recession. It seems the economy’s been doing a surprisingly good job handling these higher interest rates, and with inflation from the pandemic days cooling down, there’s chatter about a ‘soft landing’ — that’s where inflation drops without dragging growth down with it.

From March 2022 to July 2023, the Fed cranked up interest rates from almost nothing to about 5.5%, trying to put the brakes on inflation, which was hitting highs we hadn’t seen in four decades. Meanwhile, the US economy in 2023 looked pretty buff, with third-quarter growth at a solid 4.9% and unemployment playing it cool.

But here’s where JPMorgan plays the voice of caution: They think we’re going to really feel the pinch from these higher rates next year. They’re predicting this could nibble away at company earnings and put a bit of a damper on stock prices.

Their advice? Don’t start your victory dance too early. They remind us that the effects of monetary policy can sneak up on you. And they add a bit of wisdom: predicting the economy’s direction is tough, and nailing the timing of a recession is even tougher.

Now, this is where JPMorgan’s take veers off the beaten path compared to other big players on Wall Street. A bunch of these banks are betting that the S&P 500 will hit new highs next year. The index has already jumped 19% this year, thanks in part to some stellar performances by a group of tech giants I like to call the ‘Magnificent Seven.’

Bank of America’s Savita Subramanian is expecting the S&P 500 to climb another 10% to a record 5,000 points by year-end, while Brian Belski from BMO and Deutsche Bank’s Binky Chadha have their eyes on a 5,100-point target.

Their optimism hinges on the belief that the Fed will start cutting interest rates around mid-2024 to give the economy a leg up. The trading world, as per CME Group’s FedWatch tool, is expecting these cuts to start around May. Lower interest rates usually give stocks a boost since companies can borrow more cheaply, helping their future cash flows.

But JPMorgan’s team is waving a yellow flag here. They think the Fed won’t start slicing interest rates unless the economy takes a serious tumble. Their bet? Interest rate cuts in 2024 might not happen as soon as everyone’s thinking.

So, as we edge into 2024, JPMorgan’s suggesting investors might want to cozy up more to bonds and their yields, rather than piling into stocks. Yields on 10-year Treasury notes have been climbing, hitting a 16-year high in October, all thanks to the Fed’s tightening moves.

In a nutshell, while some are ready to pop the champagne for a soaring stock market in 2024, JPMorgan is more like, “Let’s keep the bubbly on ice for now.” They’re not saying a stock surge is impossible, but they’re definitely advising a more cautious, ‘wait and see’ approach. It’s like being at a crossroads in a financial thriller, and I’m here for it!

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