For now, the stock market is partying like the good times are back and will never end.
But we all know that at some point a recession is coming and with it a bear market.
|3-Month Treasury Yield||0.53%|
|2-Year Treasury Yield||2.45%|
|10-Year Treasury Yield||2.40%|
|10-3M Curve (Most Accurate Recession Forecasting Tool)||1.87%|
|10-2 Curve (Most Popular Yield Curve Followed By Wall Street)||-0.04%|
|Potential Historically Average Recession Start If Curve Inverts Now (Curve Inverted March 31st)||October 31st, 2023|
|Potential Historically Average Bear Market Start If Curve Inverts Now (Curve Inverted March 31st)||September 8th, 2023|
|Potential Historically Average Bear Market Bottom (Curve Inverted March 31st)||September 8th, 2024|
|Potential Historically Average New Record High (Curve Inverted March 31st)||December 8th, 2025|
(Source: DK S&P 500 Valuation & Total Return Tool) NOT For Market Timing Purposes, updated from a previous article
The 10-2 curve is the most closely watched by Wall Street but a study from the NY Fed finds that the 10-3 curve is the most accurate at forecasting recessions.
The good news is that the 3m-10yr curve is quite steep at the moment, and so the NY Fed estimates a 6% chance of a recession in the next year.
The St. Louis Fed’s model, based on four economic metrics, estimates a 0.0% chance we’re in a recession right now.
Currently, the bond market is mildly concerned about recession risk and we are monitoring the situation closely each day and week.
The important thing to remember is that yield curves don’t directly cause recessions, they are an indicator of tightening financial conditions that usually result in deteriorating economic fundamentals.
At the moment the economic fundamentals are strong, with the average of 18 leading indicators 20% above their historical baseline.
As you can see, this means the economic data agree with the NY Fed’s model, there is little risk of a recession over the next year.
Further good news is that even if we get a recession in 2023 or 2024, the stock market is likely to keep rising for some time.
Historically, stocks keep rising a median of 21% for 18.5 months following a 2-10 yield curve inversion, peaking right before the recession begins.
So what does this potentially mean for investors?
Assuming the historically average recession and bear market start times:
As you can see we likely have a very long time before a bear market is historically likely to begin, assuming we even get a recession at all.
- the Fed’s track record on soft landings is 3/12 so not great
- the 2-10 yield curve’s track record of forecasting recessions within 2 years is 5/6
Why You Should NEVER Try To Time The Market
Given the yield-curve inversion and rising 2023 and 2024 recession risk, why not just stick with high volatility stocks until September 2023 and then sell everything and wait for a bear market bottom?
After all, with the average recessionary bear market a 36% decline, this sounds like a pretty reasonable way to minimize market pain and maximize gain right?
If past history was all that is needed to play the game of money, the richest people would be librarians.” – Warren Buffett
Actually, it’s not at all reasonable, it’s the 2nd most dangerous thing investors can do.
According to Buffett, Munger, JPMorgan, Dalbar, Bank of America, RIA, and many others, here are the only two ways a smart person can ever go broke.
- market timing
Here is what the average investor’s attempts at marketing timing go them over the last 20 years.
- 0.8% annual real returns vs 5.4% for the S&P 500 and 3.8% for a 40% stock 60% bond portfolio
- 17% inflation-adjusted returns over 20 years
- compared to 187% inflation-adjusted S&P 500 returns
- That’s 96% lower real returns over half an investing lifetime…the true cost of market timing
And over the truly long-term market timing isn’t just a bad idea, it’s potentially a disastrous one.
According to Bank of America’s head of quantitative research:
- since 1926 the S&P 500’s inflation-adjusted returns are 1,150X
- missing just 10 of the market’s best single-day gains in each decade resulted in a 94% inflation-adjusted loss
- 98% of short-term traders lose money
- 97% of long-term buy and hold investors make money
If you think you can time the market, think again. The odds are so outrageously against you that it makes betting your life savings on a single hand of blackjack seem low-risk by comparison.
So why do I point out the increased risks of a recessionary bear market in 2023?
So we can prepare, emotionally, and…