Here’s the thing about recessions – we don’t know we’re experiencing one until after it starts. There’s been quite a bit of talk about a U.S. recession this year, so we are sharing the Verger team’s reaction to recent developments.
In its November U.S. Leading Indicators press release, the Conference Board noted that the U.S. LEI fell for the eighth consecutive month – “suggesting the economy is possibly in a recession.” Across the asset management community, estimates of the beginning of a U.S. recession vary, but have recently targeted early to mid-2023.
However, it is possible that the recession is already here. Take, for example, the LEI Diffusion Index (Chart 1). This level of significant decline is typically a strong recession signal.
Chart 1: The LEI Diffusion Index Shifts from Warning to Recession Signal
Source: The Conference Board, 11/18/2022
Similarly, an inverted yield curve is often referred to as Wall Street’s favorite recession signal. Yield curve inversion is nothing new this month (and is currently at its greatest magnitude since the 1980s), but continued curve steepening can be an additional indicator that a recession has already begun or is imminent (Chart 2).
Chart 2: Steeply Inverted U.S. 2s 10s Yield Curve – A Recession Signal
Source: NASDAQ, 12/1/2022
It Seems Inevitable
So here we are. If we’re not currently living through a recession, then best estimates point to one right around the corner. Until relatively recently, the Fed was hesitant to normalize interest rates for fear it would stifle growth and trigger a recession. Now, it seems the opposite may be true, with the Fed committed to beating inflation and leaving hawkish policies in place, despite weakening labor markets. Investors who have been hoping for a Fed pivot have been disappointed over and over, and yet some of them are (in our view, mistakenly) still holding out.
What Does it Mean for Verger?
Given our focus on all-weather, antifragile portfolios, volatility and economic uncertainty are always part of our risk assessment when allocating client capital. Recessions and market downturns can be an opportunity for us to lean into our portfolio liquidity and make opportunistic investments when others are looking for buyers at any price. Now, as ever, we remain vigilant to take advantage of potential opportunities and market dislocations.
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