Economic Update - January, 2022
posted on Fri, Jan 21, 2022
The purpose of this update is to identify any macro level red flags for a potential recession in the near term. The 2 years have been unprecedented. COVID-19 simultaneously put an end to the last market cycle and created a new one in a very short time frame. The end result will most likely be a shorter than normal market cycle. These updates will become more important now so we can proactively approach your investment strategies.
We will breakdown the analysis into 2 components:
1) EARLY WARNING - Inverted Yield Curve
An inverted yield curve is when the 2 year U.S. treasury rate falls below the 10 year U.S. treasury rate for a 30 day period. The last 10 times this happened (since 1955), the U.S. economy entered a recession within the next 16 months (on average). It has historically been a great early warning sign for an upcoming recession.
As of January 21, 2022 the 10 year Treasury rate is 1.762% and the 2 year Treasury rate is 1.012%. That is a healthy spread between the 2 rates and we have not had an inversion since the last recession. One thing to keep an eye on is the narrowing of the spread over the past few months. In October, 2021 the spread was approximately 1.3%. In November it was about 1.0%. And it is now 0.750%. If it continues at this rate we could see an inversion by this summer. As of right now there is no early warning sign of a recession.
2) CURRENT STATUS - Economic PI Baseline
To get a sense of what the current economic state looks like we use the BaR Analysis Grid©. By plotting 19 key economic indicators, the grid clarifies current economic conditions and signals how near the economy is to a recession. The mean of coordinates (MoC) indicates the overall health of the economy. Leading indicators (LD) are a subset of indicators that provide insight into emerging trends. A more in depth analysis on how to read the chart can be found HERE.
It is helpful to see a comparison between the last 2 months. It is clear that there has been significant movement over the past month from the averages being safely in the expansion quadrant to now the decline quadrant.
There are 4 major stages to an economic cycle:
1) Early Recession - Consumer expectations are at their worst, industrial production is falling, interest rates are at their highest and the yield curve is flat or even inverted.
2) Full Recession - GDP has been retracting quarter over quarter, interest rates are falling, consumer expectations have bottomed and the yield curve is normal.
3) Early Recovery - Consumer expectations are rising, industrial production is growing, interest rates have bottomed and the yield curve is beginning to get steeper.
4) Late Recovery - Interest rates can be rising rapidly, with a flattening yield curve. Consumer expectations are beginning to decline and industrial production is flat.
Based on the data from this report, as of January 21, 2022 it appears that we are in the early stages of a late recovery. As stated at the top of the blog this market cycle is moving fast and the data from the past few months is proving that out. We will want to update the information on a regular basis and adjust investment portfolios accordingly.
Please feel free to contact me anytime to discuss your personal situation in more detail.