As we navigate through 2024, a series of economic indicators are beginning to sound alarms that many market watchers can’t ignore. The signs are eerily reminiscent of past recessions, with unemployment rising, economic activity slowing, and the yield curve sending ominous signals. This article delves into these developments, examining whether the US economy is on the brink of another significant downturn.
Unemployment on the Rise: A Recession Warning
In the lead-up to both the 2001 recession and the 2008 global financial crisis, the US unemployment rate rose by 50 basis points over six months. Fast forward to today, and we’re witnessing a similar pattern. Over the last six months, the unemployment rate has climbed by the same margin, reaching 4.3%. Historically, such an increase in unemployment tends to occur either right before or during economic recessions in the US, raising concerns about what might be next.
ISM Manufacturing PMI: A Telltale Sign of a Recession
Unemployment isn’t the only red flag. The ISM Manufacturing Purchasing Managers’ Index (PMI), a crucial survey that gauges the economic activity of private sector businesses, recently came in significantly below expectations. When the PMI is high, it indicates rapid economic growth; when it’s low, it signals contraction. Currently, the PMI is below 50, a level that indicates the economy is in contraction territory. Recent readings suggest the economy is struggling, and a continuation of this trend could quickly push the US into a recession.
Yield Curve Inversion: A Classic Recession Indicator
While some were optimistic about a recovery throughout 2024, we remained skeptical. One of the main reasons for our caution is the yield curve – a powerful tool that has historically predicted economic downturns. The yield curve reflects the difference between short-term and long-term interest rates, and when it inverts (short-term rates are higher than long-term rates), it’s often a sign that a recession is looming.
Historically, an inverted yield predicts economic activity one year in advance. The yield curve has been inverted for an extended period, the longest since 1929, just before the Great Depression. This persistent inversion significantly increases the likelihood of a severe economic downturn, as it suggests the Federal Reserve’s tight monetary policy is strangling economic growth.
Flight to Safety: Treasury Bonds and Market Volatility
Given the economic outlook, it’s no surprise that investors are flocking to safer assets like US Treasury bonds. Our largest trade currently involves the TLT ETF, which tracks the prices of long-term US Treasury bonds. Historically, during economic downturns, Treasury bonds tend to rise in value as investors seek shelter from the storm. In the last two recessions, TLT rose by 40%, and recently, it has surged by about 10% while stocks have declined sharply.
This “stocks down, bonds up” environment is typical of recessionary price action, indicating that investors are dumping stocks due to fears of weakening economic activity and rushing into Treasury bonds for safety. The recent surge in TLT, coupled with the decline in stocks, suggests that we might be on the cusp of another major downturn.
Market Volatility: Panic or Opportunity?
The VIX, often referred to as the market’s “fear gauge,” recently spiked from low levels in July to heights comparable to those seen during the 2020 and 2008 financial crises. This spike, although short-lived, highlighted the extreme panic among investors, who were frantically selling off stocks on recession fears.
However, such spikes in volatility have historically coincided with major market bottoms, offering buying opportunities. While 2008 and 2001 where exceptions – where the market continued to decline after a volatility spike – most other instances, such as in 1998, 2002, 2010, 2011 and 2020, were followed by significant market rebounds.
From a technical standpoint, the S&P 500 has broken a key rising price channel and is testing crucial moving averages for the first time since 2023. We’re closely monitoring this as a potential buying opportunity for a short to medium-term rally.
Conclusion
There are growing concerns of an impending economic downturn in the US, highlighted through key indicators such as rising unemployment, a contracting ISM PMI, and an inverted yield curve – all of which have historically preceded recessions. The surge in Treasury bonds and recent market volatility further underscore the market’s anxiety, suggesting that a significant downturn may be closing in. On the other hand, the big spike in VIX recently might be a near-term buying opportunity for a short to medium-term rally before the market actually prices in a full-blown recession. Click here to sign up! Subscribe to our YouTube channel and Follow us on Twitter for more updates!
