After suffering the worst six-month loss in over 50 years the S&P 500 and other indexes stabilized and then rallied for two months only to face more volatility to the downside.
It’s very likely that the downturn we have been experiencing will get much worse and the bear market is likely not over.
And the problem this may create for stock investors is summed up in a quote by famed investor Peter Lynch: “You get recessions, you have stock market declines. If you don’t understand that’s going to happen, then you’re not ready. You won’t do well in the markets.”
One Major Sign We’re in a Recession
So, are we in a recession or not?
In the first two quarters of this year we have had two negative quarters of GDP, which is the “unofficial” definition of a recession. The official determination rests solely with the National Bureau of Economic Research – and only with the benefit of hindsight.
A safer bet may be to trust that the two quarters of negative GDP means we are likely in a recession. Charlie Bilello of Compound Capital Advisors pointed out that the last 10 times we’ve seen two consecutive quarters of negative economic growth going all the way back to 1947, the U.S. was indeed in a recession.
Seven Other Recession Red Flags Waving Right Now
Besides this pattern there are other red flags pointing to a further slowdown:
- Housing has been a major driver of economic growth over the past two years but now appears to be slowing dramatically due to recent rate hikes, according to InvesTech Research.
- The National Association of Home Builders reported that both the Builder Confidence Survey and the Traffic of Prospective Buyers Survey continue to crater as rising home prices and decade high mortgage rates are keeping potential buyers on the sidelines. The association went on to state that conditions have gotten so bad that we’re now in a “housing recession,” which could seriously contribute to the depth and duration of an economic recession.
- The2-year versus 10-year Treasury yield curve recently inverted once again, meaning that the shorter-term investment is actually yielding more than the longer-term investment. Historically this inversion signals a recession. The last time it inverted this much was the year 2000 after which the S&P 500 fell another 48.1% to the eventual bottom. Of course, it doesn’t mean it will play out the same way this time but investors who ignore such a red flag do so at their own peril.
- The University of Michigan Consumer Sentiment Index hit a reading …….