Coming Recession?
Summary
The Federal Reserve Bank of Atlanta’s GDP Now is forecasting potential negative GDP growth for Q1 2022.
The Yield Curve is falling quickly, which is a recession signal.
Federal Reserve Bank of Atlanta’s GDP Now Forecast
The Federal Reserve Bank of Atlanta tracks current quarter GDP data and publishes their results in their GDP Now tracker. Currently Q1 2022’s GDP is flirting with a negative number, signaling a potential recession. The green forecast line in the chart below, dipped into negative territory last week and currently holding the zero level.
Yield Curve Falling Rapidly
The yield curve, the 10 year treasury rate minus the 2 year treasury rate, is falling rapidly. Noted in yellow you can see that a recession generally follows the ‘inversion of the yield curve’ (which means that it goes negative, where the 2 year treasury rate is higher than 10 year treasury rate.
The yield curve is a economic growth signal. A rising yield curve is a signal that the bond market sees rising growth, a falling yield curve is a signal that the bond market sees slowing growth. A negative yield signals negative growth. The bond market tends to sniff out negative growth six months before a recession actually hits, typically.
Caution is Warranted
In my opinion stock market valuations are at epic levels, the highest in decades in many areas.
Investors should understand that, at these high valuation levels, a recession could cause significant damage to their stock portfolios. This damage could then cause significant disruptions to an investor’s retirement plans.
Add to these problems we have the highest inflation rates in 40 years. Due to that the Federal Reserve cannot use its’ money printing tools or lower interest rates to combat a recession (because money printing will make inflation worse and because they can’t lower interest rates when they are already at zeo).
Investors should examine their retirement plans and understand how much of their investment accounts they want subject to a potential, major correction in the stock market. Any significant economic developments, geopolitical events, or a break in trend could cause problems for investors.
Investors can take advantage of Highcroft’s Wealth Shield discipline, that is designed to protect capital.
Note: past performance is not an indication of future results and expectations might not materialize. Current investor concerns could evaporate as fast as they occurred.
LPL 1-05252738
DEFINITIONS
10 Year Treasury Constant Maturity Minus 2 Year Treasury Constant Maturity - Treasury bond data used in calculating interest rate spreads is obtained directly from the U.S. Treasury Department. Series is calculated as the spread between 10-Year Treasury Constant Maturity (BC_10YEAR) and 2-Year Treasury Constant Maturity (BC_2YEAR). Both underlying series are published at the U.S. Treasury Department.
Atlanta Fed GDPNow – The Atlanta Fed GDPNow estimate is a model-based projection. It is not an official forecast, it is best viewed as a running estimate of real GDP growth based on available economic data for the current measured quarter. There are no subjective adjustments made to GDPNow, the estimate is based solely on the mathematical results of the model. The model does not capture the impact of COVID-19 and social mobility beyond their impact on GDP source data and relevant economic reports that have already been released. The model does not anticipate future economic reports.
Blue Chip Economic Indicators – Utilized by the Atlanta Fed GDPNow. Each month since 1976, Blue Chip Economic Indicators has polled America's top business economists, collecting their forecasts of U.S. economic growth, inflation, interest rates, and a host of other critical indicators of future business activity. Our 30+ year track record of providing corporate and government decision-makers with our survey results has made Blue Chip Economic Indicators synonymous with the latest in expert opinion on the future performance of the American economy. The editor of the Blue Chip Economic Indicators is Joseph Aguinaldo.
Blue Chip Financial Forecasts – Utilized by the Atlanta Fed GDPNow. The forecast provides the latest in prevailing opinion about the future direction and level of U.S. interest rates. Survey participants such as Bank of America, Goldman Sachs & Co., Swiss Re, Loomis, Sayles & Company, and J.P. MorganChase, provide forecasts for each of the next six quarters for the following variables: Federal Funds Rate, Prime Rate, LIBOR, 3-month, Commercial Paper, 1-month, Treasury Bills, 3-month, 6-month, 1-year, Treasury Notes, 2-year, 5-year, 10-year, Average Long-term Treasury Yield, Corporate Aaa Bond, Corporate Baa Bond, State & Local Bond, Home Mortgage Rate, Fed's Major Currency Index, Real GDP, GDP Chained Price Index, Consumer Price Index.
FRED: Federal Reserve Economic Data – a database maintained by the Research division of the Federal Reserve Bank of St. Louis that has more than 500,000 economic time series from 87 sources. The data can be viewed in graphical and text form or downloaded for import to a database or spreadsheet and viewed on mobile devices. They cover banking, business/fiscal, consumer price indexes, employment and population, exchange rates, gross domestic product, interest rates, monetary aggregates, producer price indexes, reserves and monetary base, U.S. trade and international transactions, and U.S. financial data. The time series are compiled by the Federal Reserve and many are collected from government agencies such as the U.S. Census and the Bureau of Labor Statistics.
Wealth Shield – A rules-based discipline that has capital preservation as its’ primary objective. The program exits investments that have broken a bull trend, shifting those investments into cash which is then ready funds to be reinvested into those investments that have superior momentum characteristics.
The discipline can lock in gains or minimize losses, preventing further declines. Wealth Shield acts as a brake when investments and markets generate downward momentum. Please note that this service is only provided on the Strategic Asset Management (SAM) accounts that Gerald Asplund manages with discretion, it does not apply to any non-discretionary accounts such as brokerage, 401k, or insurance accounts.
IMPORTANT DISCLOSURES
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