Editor's note: Recession clouds are still looming over the horizon... Investors are monitoring the rampant market volatility we've experienced over the past few months in an effort to determine what's coming next as we approach 2024. According to Vic Lederman – editorial director of our corporate affiliate Chaikin Analytics – the Federal Reserve's aggressive rate-hike strategy has set us on a path straight toward a recession... But Vic says it's crucial for investors to continue putting their money to work today in order to maximize their profits before this crisis hits. In today's Masters Series, adapted from the September 28 and November 3 issues of the Chaikin PowerFeed daily e-letter, Vic explains why he's wary about where the economy is headed... details how the "Fed spread" indicates we're still several months away from a recession... and discusses how investors can take advantage of this window before the downtrend begins...
My 'Recession Alarm Clock' Keeps Me Up at Night By Vic Lederman, editorial director, Chaikin Analytics Our marketing folks are always so dramatic... They want the biggest, juiciest numbers. They want claims of massive upside potential. And they want everything to happen in the blink of an eye. That's the type of stuff that attracts the most attention. So it makes life easy for marketers. But as we all know, the stock market doesn't always work like that... I have the perfect example, too. One of our top marketing folks reached out to me and asked, "Vic, what keeps you up at night?" After all, things seem bad in the market right now. The S&P 500 Index is down roughly 4% from its peak. And it might feel like it's nearly impossible to stay focused on the long term. But here's the thing... I got asked that question more than a year ago. That's not even the craziest part...
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You see, the thing that kept me up at night back then is still true today. Let's look closer at why this idea continues to hold my attention. You'll see why you should be watching it, too – and why it shouldn't keep you from growing your portfolio yet... Now, I first got asked about what keeps me up at night on August 24, 2022. That was 15 months ago. And as I said, it's still true today... I'm talking about what some folks in the industry call the "Fed spread." It's the difference in the yields on the 10-year U.S. Treasury note and the two-year U.S. Treasury note. That might sound esoteric. But it's easy to understand once you know why we look at it... U.S. Treasury bills, notes, and bonds are essentially "IOUs" from the government. They range from four weeks to 30 years. And importantly, they're the standard for interest rates on all other loans. To that point, 10-year loans should charge a higher rate than two-year loans. That's because a 10-year period has more "time risk" in it than a two-year period. But occasionally, the market gets out of whack. When that happens, short-term rates can rise above long-term rates. It can occur for all kinds of reasons. But the Federal Reserve raising interest rates usually plays a big role. And of course, we've lived through that for more than a year now. You can see on the chart that a so-called "rate inversion" almost always happens before a recession (the gray bars). It's a nearly infallible sign of tough times ahead. Take a look... In every case, a recession didn't officially start until after the Fed spread moved back above zero. In fact, history tells us that it can take several months for a recession to happen. Now, there is one monkey wrench in this idea. In the 1980s, we endured multiple recessions and wild yield-curve fluctuations. You probably notice something else about the chart as well... The Fed spread is currently the most "inverted" it has been since the early 1980s. That keeps me up at night. But as you can see on the chart, the recession always lags the rate inversion. And sometimes, it can be years before the storm arrives. So today, we know that something is wrong with the markets. The Fed spread is inverted. And more than four decades of market history tell us that eventually leads to a recession. So when will I set my "recession alarm clock"? I'll set it for "once the Fed spread moves above zero again." And even then, I'll know that doesn't necessarily mean we should sell everything right away. History tells us we'll likely have months of opportunity left in the market at that point. You see, the growth-focused Nasdaq Composite Index has soared more than 16% since June 2022. That's when the Fed spread first inverted during the current cycle. So in short, the opportunity hasn't dried up. You can still make money if you know where to look today. That's true even after a rough couple of months in the market. Don't get caught sitting on the sidelines waiting for a recession. You could be waiting a long time. Good investing, Vic Lederman
Editor's note: Don't hide your money on the sidelines out of fear of this looming recession. In fact, following the usual crisis playbook could result in more devastating losses for your portfolio than at any other time in recent history... That's why Chaikin Analytics founder Marc Chaikin recently teamed up with Joel Litman – chief investment strategist for our corporate affiliate Altimetry – for an online presentation to reveal exactly what to do with your money moving forward. The next steps you take could determine your wealth for the next decade. Click here to watch the full replay...
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