The organization that in the U.S. says whether the economy is in a recession or not seems to be asleep on the job.
The National Bureau of Economic Research defines a recession as the period between a peak of economic activity and its subsequent trough, or lowest point. There is no debate that the NBER was correct in calling the last cycle’s peak in February 2020, but the bottom was, if you look at jobless claims, late April, and no later than May if you look at employment or personal income.
For markets, there is significance to when the economy is in expansion or recession. According to research from Deutsche Bank, growth, as measured by the Institute for Supply Management’s manufacturing index, typically peaks 10 to 11 months after a recession ends. That would be right now, if you go by the NBER’s definition of recession and not its stubborn refusal to say it.
Over the last 20 years, there has been a 73% correlation between the annual, rolling gains of the S&P 500 SPX,
According to the Deutsche Bank numbers, the S&P 500 sold off around growth peaks by a median of 8.4%, and dropped by a median of 5.9% when the ISM flattened instead of fell. And the timing of these drops was soon from the peak — usually two weeks after, lasting six weeks in total.
So when that peak comes is important. And Deutsche Bank says it will come in the next three months — not a huge shock given that the March reading registered 64.8%, a 38-year high.
“As growth peaks over the next three months, we expect discretionary investors to pare their positioning from extremely elevated levels, and see retail investors as unlikely to buy the dip. Using the historical experience as a guide argues for a near -6% pullback if growth flattens out near the peak, a bigger -8.4% pullback on an inverted-V in growth,” said strategists led by Binky Chadha.
From there, though, equities may rally back, they say. And the key in the late summer and autumn will be whether inflation sustains or accelerates, and how the Federal Reserve reacts.
Fed minutes on deck
The minutes from the last Fed interest-rate decision will be released at 2 p.m. Eastern. The markets will focus on any discussion surrounding the timing of slowing the rate of bond purchases, and how “substantial further progress” toward maximum employment and price stability goals — the Fed’s condition for tapering — is defined.
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The yield on the 10-year Treasury TMUBMUSD10Y,
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