Market Watch News

How Close Is A Recession? Probably About 18 Months – 2 Years

Sorry we haven’t posted in a while. In all seriousness, there really hasn’t been much news in the markets. Yes, it’s reaching all time highs, but that’s just as planned for the end stages of the bull market. Expect more volatility, use caution when adding large chunks of money to your positions, but don’t expect the “crash” any time soon. In other words, don’t let any kind of news scare you off. This market has room to run.

How do we know? Well, we previously posted a bit about inverted yield curves here:

Yield Curves and Recessions

It’s one of those super nerdy economic indicators that bores people to tears. All you need to know is this: when the yield curves invert, a recession is typically 12-18 months away. A yield curve inverts when the markets and the Federal Reserve seem to disagree about the direction in the economy. The most popular indicator of a coming recession is the 10 year yield – the 2 year yield. Don’t worry about what that means exactly, you JUST need to know where to look for the number and what it means. The other most common indicator is the 10 year – 3 month. The 10 year – 3 month spread number is typically warning sign one before the 10 year – 2 year. ONCE AGAIN, do  NOT worry if you don’t know what this means exactly. We’re going to show you where to find a chart to cheat and know what the big heads of finance know.

10 year – 3 month Yield Spread = Warning Sign #1

10 year – 2 year Yield Spread = Warning Sign #2

When you load those charts, you just need to see if the blue line has crossed below the 0 line (black) at the bottom. You don’t need to understand the mechanics, you are just looking for it to dip below 0. Here is a snapshot of where the 2 warning signs stand today:

10y3yspread 7.25.19

As you can see, the blue line just crossed below 0. And you see those 3 shaded areas that come before? Those are recessions. Notice a pattern between the blue line dipping below 0 and those 3 shaded areas? This indicator has worked 100% of the time since the spread has been tracked around 1982. So that’s warning sign one and will show up before our next warning sign.

10y2yspread7.25.19

Notice that this one hasn’t crossed below 0. But you also notice, those 3 grey shaded areas have the same pattern seen with the 10 year – 3 year chart.

Ok, here is where our estimation of a recession comes in… When the 10 year – 2 year chart crosses below 0, a recession typically takes 12-18 months to show up. Right now, the first warning sign (10y-3m) has fired off, but we haven’t yet dipped below 0 on the famous signal (10y-2y). That gives us a bit more time, but we need to keep an eye out.

So consider this: the big crashes happen around the time a recession is imminent, but if you hear the talking heads on the news site this nerdy signal as if a crash is going to happen tomorrow…well, they’re talking out of their asses. We have time. Hold your positions in this bull market and if you want to check on this signal from time to time, have at it.

Cliff’s Notes:

If the blue line on this chart, crosses below the black 0 line. We probably have 12- 18 months before an actual recession. It’s close, and a warning sign has already fired off, but we’re not there yet.

Related note:

Check out this post if you want to a way to predict where interest rates are going next.