What does science say about a future recession?

This week we witnessed another inversion of the yield curve in the United States. This time, the yield on 10-year treasury bonds fell below the yield on 3-month bonds. The situation is not entirely normal from the point of view of common economic sense: long-term bonds should generate greater returns than short-term ones in order to take into account the risk premium and uncertainty, as well as the value of money over time.

Recall that the inversion of the revenue curve usually occurs on the eve of the recession. We also note that the inversion of the yield curve we observed back in 2019. That is, warning signals are more than enough. An important nuance is the presence of a time lag between the appearance of the signal (inversion of the yield curve) and its development (the beginning of a recession in the economy).

This time, the inversion of the yield curve is associated with fears due to the coronavirus epidemic.

But today we’ll talk not only about the predictive abilities of the inversion of the yield curve but also about the study of MIT scientists and economists who, based on the original econometric model, see the risk of a recession in the USA in the foreseeable future.

The model is based on four variables: industrial production, NFP, stock market price dynamics, and the yield curve. Analyzing the data for the last 100 years, scientists came to the conclusion that the index calculated on the basis of these indicators is a good indicator of the onset of a recession.

Each time the index value exceeded 70%, the likelihood of a recession over the next 6 months increased to 70%. So back in November 2019, the index value exceeded 76%. That is, in the near future, the US economy has significant chances to face serious difficulties. Even the probability of this event is calculated - more than 70%.

It is not necessary to speak purely formally about the recession in the United States here and now if only because in order to state the fact of its occurrence, it is necessary to reduce GDP for two consecutive quarters. But once again we note that a critical mass of problems has already been accumulated and the coronavirus epidemic is an ideal trigger for their materialization.

In total, there are more and more signals in favor of the worsening situation in the global economy in general and the USA in particular. This will inevitably lead to massive sales in the stock markets.

Recall that we consider 2019 the last year of unjustified growth in the US stock market. Already in 2020, it will begin to adjust. The scale of correction is from 50% and higher. Given that in recent years, shares of technology companies in the US stock market have grown by an average of 7-8 times (and some issuers have shown growth of 10 or even 20 times), the US stock market will no doubt become the object of massive sales. We recommend participating in this process, selling both the market as a whole (Nasdaq index) and the shares of individual issuers (Apple, Microsoft, Alphabet, Oracle, etc.).