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Is an impending recession in sight?

The Fed has already hiked interest rates twice this year during the last two FOMC meetings in March (+25bp) and May (+50bp). A third-rate hike of 50bp is expected in the next FOMC on June 15, 2022, as the Fed fights soaring inflation.


Should stock investors worry about a third-rate hike?


Perhaps this time may be different. But the three steps and a stumble rule suggest three consecutive rate hikes from the Fed can lead to a stock market top and a significant stock market decline.


Although a third-rate hike of 50bp in June will result in the fed funds target rate at 1.25-1.50%, it is still well below the historical norms of 3%.


Many believe bull markets do not die of old age but rather at the hands of the Fed. Also, bull markets do not die of old age. The excess, overspending, overleverage, and overconfidence spell the end. Yet others believe bull markets do not die of old age but from fright.


What are bull markets scared of the most?


Investors have become increasingly nervous as the end of cheap money, rising inflation, and tighter monetary policies from the Fed may trigger a recession and, worst, a stagflation economic cycle.


Is a US economic recession inevitable?


What are the classic signs of an impending US economic recession?


A review of the following four key indicators shows mixed-to-weak trends for the US economic outlook.


1. Weak or deteriorating credit markets coupled with a financial crisis are often a precursor to an economic slowdown. An inversion of the US yield curve (i.e., 10-year US treasury yield minus the 20-year yield) can also signal an impending US recession.


Over the past 32 years, six (6) ten-year minus two-year spread inversions have developed. Five (5) US yield curve inversions led to US recessions. Only the Jun 1998 inversion did not spark a US recession. It took around

8.5-10.5 months from the time of yield curve inversion before an official US recession. Does the early-Apr 2022 inversion (-0.06) imply the next US recession can start as early as Dec 2022 to Feb 2023?


2. Sharp deterioration of the Conference Board US Leading Economic Index (LEI) has historically led to a recession.


The ten components of the Conference Board Leading Economic Index (LEI) decreased by 0.3 percent in April 2022 to 119.2 (2016 indexed to 100). The decrease comes after a 0.1 percent increase in March. During the six months from Oct 2021 to Apr 2022, the LEI continues to trend higher and is now up 0.9 %. However, the year-over-year % change in the LEI declined. The fall in the year-over-year % change hints at early signs of moderating economic growth. The risks from rising inflation, higher interest rates, supply chain bottlenecks, the Russia/Ukraine debacle, and pandemic shutdowns in China and other parts of the world may be weighing on the economic outlook. The contraction in the first quarter’s real GDP and the recent Conference Board LEI numbers are consistent with moderating-to-flat economic growth in the US.


3. Dramatic declines in US consumer sentiments (i.e., University of Michigan Consumer Sentiment Index and the Conference Board Consumer Confidence Index) can lead to lower consumer demand and US recession.


The Conference Board Consumer Confidence Index (97.06) has fallen sharply over the past 2-years. The index has already declined below the Mar 2020 pandemic induced recession low (98.32) and now challenges the 1982 double-dip recession and 1990-1991 recession lows (97.126-97.137). Is this a bottom? Or will the index need to decline toward the mid-90s to retest the 1974 recession, the 2009 global financial crisis, 2011 European Debt, and US Debt downgrade crises?


The University of Michigan Consumer Sentiment Index (59.10) shows US consumers have turned overwhelmingly pessimistic after peaking at a high (101) nearly two years ago. Will the U of Michigan Consumer Sentiment Index find a bottom near the 2008/2011 lows at 55.30-55.80? Or will MCSI need to retest the 1980 extreme low of 51.70?


4. A peak and dramatic decline in US housing start often warning of an economic contraction. Because new housing is a huge capital expenditure, it tends to spur additional consumer spending such as new appliances, furniture, renovations, etc. It remains an important economic indicator closely tracked by economists and forecasters.


Housing starts in the US declined 0.2% month-over-month to an annualized 1.724 million units in April 2022. It has declined over the past two months after peaking at 1.777 million units in February 2022 and 1.728 million in March 2022. The US housing market shows signs of cooling as inflation rises and mortgage rates trade at 12-year highs. Elevated building material costs, supply constraints, and economic uncertainties may be slowing the demand from home buyers. The last time housing starts reached 1.792 million units was Dec 1998 top and the breakdown in Jun 2006. Are the housing starts high in Feb 2022, signaling a temporary or longer-term peak?


Source: Chart courtesy of StockCharts.com

Source: Chart courtesy of StockCharts.com, The Conference Board, and NBER

Source: Chart courtesy of StockCharts.com, The Conference Board, and NBER

Source: Chart courtesy of StockCharts.com

Source: Chart courtesy of StockCharts.com

Source: Chart courtesy of StockCharts.com

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