Economic Update - March, 2022
posted on Sat, Mar 12, 2022
The purpose of this update is to identify any macro level red flags for a potential recession in the near term. The past 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 10 year U.S. treasury rate falls below the 2 year U.S. treasury rate for a period of time. 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 March 12, 2022 the 10 year Treasury rate is 1.997% and the 2 year Treasury rate is 1.746%. That is a narrow spread between the 2 rates, but we have still 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%. In January, 2022 it was 0.750%. On March 12, 2022 the spread is only 0.251%. If it continues at this rate we could see an inversion by this summer (or earlier). As of right now there is no early warning sign of a recession, but it is getting very close.
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. On a positive note, it appears some of the data points have pushed out of the declining (late stage) quadrant and into the expansion (mid stage) quadrant. This is normal towards the end of a market cycle to see some back and forth between those 2 quadrants.
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 March 12, 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.