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#36 S2N: Recessions Before and After

#36 S2N: Recessions Before and After

Michael Berman, Ph.D.
April 08, 2024

In today’s issue:

Recessions before and after and average performance
Excess Liquidity is no longer as Excessive

Today’s Spotlight

Whenever I read the newspaper or read some financial commentator forecast that a recession is coming, my natural reaction is to think the world is about to end.

I took all the official dates of recessions published by the National Bureau of Economic Research (NBER). I then plotted the cumulative returns for 252 trading days (1yr) before the start of the recession and the cumulative returns for 504 trading days (2yr’s) after the start of the recession. I then created a thick black line for the average of all the returns before and after the recession start date.

My takeaway is simple. Yes, recessions are bad for the broad stock market. However, if you apply some knowledge learned at S2N, you will know that within 2 years from the start of a recession, the stock market is back to positive returns. Knowledge is power. Emotions and market noise can be dangerous.

S2N Insights

Excess Liquidity is No longer as Excessive

What you can see from the chart above is that the Fed’s quantitative tightening (QT) from COVID has largely been drained out of the system. There is still another $430 billion of reverse repo that needs to be drained. The reason I am raising this is because we can see that bond yields are climbing. The 10-year Treasury yield in the chart below is trending up. So the trillion-dollar question is whether yields will top 5% like they did late last year. If the Fed is committed to shrinking its balance sheet, then who is going to buy bonds to keep the yield from climbing, especially if the Fed is committed to slashing short-term rates, which could mean more inflation and hence higher long-term bond yields? I think we all need to be watching the 10-year yield.