98% Chance of a Recession?

The war on inflation is here. Is this a sign to sell our portfolios and get out of the market? Let’s unpack NDR’s research to find out.

It’s been a rough, past week for financial markets.

After the Fed’s 0.75% rate hike last Wednesday, there’s nothing but bad news.

Stocks, bonds, global currencies (the British pound, Japanese yen, Euro, Chinese yuan) and oil prices tanked.

Other central banks followed behind the Fed by raising their own rates in a bid to fight inflation. And stemmed the sell-off in their currencies.

To cap it off, Ned Davis Research now sees a — 

98% chance of a global recession

The war on inflation is here.

Is this a sign to sell our portfolios and get out of the market?

Let’s unpack NDR’s research to find out.

Ned Davis Research is an independent research provider, and what they are strong in is their rigorous economic models and rich data research.

For example, their extensive data on dividend growers’ outperformance were compiled by them, together with the Hartford funds.

 

Now, Ned David Research recently released a report on their recession probability model (see below, orange bubbles) — showed that signals all pointed to a rising chance of a severe, global recession some time in 2023.

And this model predicted current macro environment could put on more pressure for global stocks.

Further, the major independent research group said: “Based on historical norms, a moderate global slowdown has already been priced into most asset classes this year, but a severe global recession has not.”

Now, the only other time this predictive model was this high was during COVID in 2020 and the global financial crisis in 2008.

Even before the war in Ukraine started, the model has already climbed into a “high-risk” zone, showing an early sign for a stock market correction. 

Yield curve inversion also a sign of recession 

This coincided with other predictive indicators like the inverted yield curve.

When the short-term 2 years Treasury yields are higher than the long-term 10 years government yield, this means the US economy is in a recession.

Since 1980s, an inverted yield curve (red circles below) precedes a global recession (see grey bars below)

The 10yr minus 2yr Treasury is currently a negative 0.39%.

Which says, both models point to a recession — does it mean we are already in a recession?

Although Ned Davis Research said recessions risks are high, they also said: “We do not have any conclusive evidence that the US is currently in a recession.”

What’s interesting here is, a closer look at Ned Davis Research’s model is it seemed to be a lagging indicator of a recession.

You see, when indicators are at the highest point, the stock market is at least already, more than half-way to the bottom levels (see red arrows below).

Today’s massive inflation eerily mirrors the 1980s inflation?

People say today’s inflationary period is eerily the same as it was in the 1980s, and there could be a repeat of that era all over again.

To be honest – I’m not sure.

But what I know was, the massive inflation run-up during the 1980s was driven by an oil crisis in the 1970s. And huge fiscal spending to encourage consumer and business spending, Back then, US economy was recovering from the Vietnam War in the 1970s.

Today, a key difference here is this crazy inflation is mainly caused by supply chain disruptions due to COVID, and oil shortage due to the war in Ukraine.

The thing is, as the world recovers from the pandemic, supply catches up and the war in Ukraine stops, then perhaps we could see and price ease up. 

But what if inflation keeps going up?

But what if inflation doesn’t go down, and rates continue to climb higher?

Well, then we could see the recession forcing unemployment rate to go up, business cuts spending, consumer cuts spending.

Though I don’t think the magnitude will be the same as it was in the 1980s given the reasons I’ve mentioned above.

Then the question remains: is it a good time to sell off our portfolios today? If we are indeed already in a recession, selling now means at selling off a portfolio at the worst possible price.

I’ll do this instead…

On the other hand, a good way from here instead, is to average down your buys.

Break up your buys into like 5-7 tranches at a time.

For instance, it could by buy when the market falls 25%, down 30%, down 40% and of course, when the market is down more than 50%.

Think about this, which chart would you think will more likely work out?

1) Trying to time the market by bottom fishing:

2) Or buying in tranches all the way down and up:

I’m building a dividend portfolio, where I’m accumulating great businesses that pay dividends over time.

Instead of selling, I find it’s better to accumulate more dividend growers.

In fact, selling down our portfolios mean that we probably would miss out all the juicy dividends that come with it. Agree?

Sometimes, investing can be simple. 

Willie Keng, CFA

Founder, Dividend Titan

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