Market Watch: A Warning Sign for Wall Street
The US stock market has been on a tear, with the Dow Jones Industrial Average, S&P 500, and Nasdaq Composite reaching multiple record highs in 2024. However, a reliable forecasting tool is flashing a warning sign that investors should not ignore.
A Recession Probability Indicator
The Federal Reserve Bank of New York’s recession probability indicator has a reputation for being virtually flawless. This tool examines the spread between the 10-year Treasury bond and three-month Treasury bill to calculate the likelihood of a US recession within the next 12 months. Currently, it indicates a 57.05% chance of a recession by September 2025.
Yield Curve Inversion: A Necessary Ingredient for a Recession
The yield curve inversion, where short-term bills sport higher yields than long-term bonds, is a necessary ingredient for an economic downturn. While not every yield curve inversion is followed by a recession, every US recession following World War II has been preceded by a yield curve inversion.
A Bumpy Ride Ahead?
Based on the NY Fed’s recession probability tool, the Dow, S&P 500, and Nasdaq Composite could be in for a bumpy ride in the quarters to come. A recession would be expected to drag down corporate earnings, which would be bad news for Wall Street and its major stock indexes.
Taking a Step Back
However, it’s essential to maintain perspective and look to the horizon. Recessions are normal and inevitable, but they are historically short-lived. Only three of the 12 recessions since the end of World War II endured for at least one year, with none surpassing 18 months. Wagering on the US economy (and subsequently corporate earnings) to expand has been a winning strategy.
The Value of Being a Long-Term Optimist
Data from Bespoke Investment Group shows that the average S&P 500 bear market has lasted only 286 calendar days, or roughly 9.5 months. Comparatively, the typical bull market over 94 years has endured 3.5 times as long (1,011 calendar days). The value of being a long-term optimist couldn’t be clearer.
Conclusion
While we can’t predict short-term directional moves in the market with concrete accuracy, long-term-minded investors should maintain perspective and allow time to work its magic. With the right mindset and strategy, investors can navigate the ups and downs of the market and achieve their financial goals.
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