A chart tracking market expectations for interest rates is flashing a signal never seen.
It says, the market expects the Fed to cut rates by 1% over the next year.
This has never happened before.
The closest we’ve come to this is when the market expected a 0.3% cut.
This has only occurred 4 times since 1962:
- Jan 1974
- Dec 1980
- Oct 2000
- Feb 2020
Each instances was followed by:
- Stock market decline
- An economic recession
Why This Signal Matters
These signals have been reliable in predicting recessions.
They show that investors expect the Fed to cut rates quickly.
Historically, the Fed lowered rates a lot after these signals.
This happened because the economy was getting weaker
Our expectation for the past few months has been that the US economy is heading into a recession, and that the Fed will need to cut interest rates.
This has led us to recommend key recession hedges, like:
- GDX (Gold mining ETF) – up +36%
- TLT (Treasury bond ETF) – up +10%
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Is a Recession Imminent?
Lowering the threshold to 0.2% reveals 2 additional signals beyond the 4 instances of 0.3% cuts since 1962.
This happened in June 1989 and April 2019, both instances that did see rate cuts soon after.
But in these 2 cases, the signals came more than 6 months before the recession.
During that time, stocks kept rising until the recession hit.
This brings up the question of the timing of the recession.
Even though these signals appeared near a recession, they didn’t mean it would happen right away.
In fact, we saw a similar signal in March 2023, and 18 months later, no recession has occurred
The Inflation Factor
One of the key reasons for this false signal was the sharp drop in US inflation.
High inflation led to Fed rate hikes, but as inflation dropped, markets started expecting rate cuts.
Market expectations for 10-year inflation closely match Fed rate cut expectations.
This suggests the recent drop in rate expectations, with the market expecting a 1% Fed rate cut next year, might be due to lower inflation expectations, not a crashing economy.
Current Market Structure
Now, the S&P 500 remains in a bullish structure.
August and September are typically volatile months, which we’re seeing play out today.
If the S&P 500 can break above its downtrend line, it could trigger another move higher.
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Read more: Interest Rates are Crashing Like They Did Right Before 2008…
