The Man Behind the Best Recession Indicator Flips His Position By Brett Eversole
"My yield-curve indicator has gone code red, and it's 8 for 8 in forecasting recessions since 1968 – with no false alarms," Campbell Harvey said in a recent interview... "I have reasons to believe, however, that it is flashing a false signal." Harvey is an economist and a finance professor at Duke University. He made a name for himself when he published his dissertation back in 1986. What he found was a breakthrough in the finance world... It showed that before each of the four recessions from 1965 to 1985, the yield curve inverted. That made it a powerful warning sign of economic trouble. Today, the yield curve has inverted once again. And that's a major reason why just about everyone expects a recession in the coming months. But Campbell Harvey... he's changed his tune. He believes his indicator could be giving a false signal. Let me explain...
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An inverted yield curve means that short-term interest rates are higher than long-term interest rates. That's an abnormal situation... And it tends to happen before an economic slowdown. Harvey's research proved it. And since the discovery, his yield-curve indicator has triggered four more times. A recession followed in every case. The yield curve inverted last year. But Harvey doesn't believe it this time. One reason is that today, everyone knows about the indicator. When economic or financial indicators become well-known, they tend to stop being as powerful. Similarly, Harvey notes that the job market is strong. Unemployment is still low. Take a look... 
We're just not seeing layoffs on the kind of scale that typically happens during a recession. Employers are still looking for workers, too. Job openings are high, as you can see below... 
It's hard to have a recession when everyone has a job and finding a new one is easy. Lastly, Harvey notes that inflation is falling... And that's a good sign for the economy. "When you put all this together it suggests we could dodge the bullet," Harvey said. "Avoiding the hard-landing – recession – and realizing slow growth or minor negative growth. If a recession arrives, it will be mild." Harvey's ability to flip his position – on an indicator that he discovered – is impressive. Most folks aren't willing to do that, even in the face of the evidence. And as investors, we need to pay attention. Everyone expects a recession. It has become the consensus bet. The problem with that is one we know well... When everyone is certain of an outcome, it's less likely to occur. Even if a recession does come, it'll be what everyone predicted. The damage to stocks could be minimal. Not to mention that the market has already priced in falling earnings... which is the downstream effect of a recession. Our estimates show earnings will only be down around 6% to 7% in 2022. Yet the S&P 500 Index dropped nearly 20% last year. That's the market pricing in a coming recession and a further earnings decline. But what if neither shows up? We're not guaranteed to "dodge the bullet" today. Just because Harvey is questioning his indicator doesn't mean he'll be right. But make no mistake... The surprise potential for stocks isn't to the downside today... It's to the upside. Everyone expects more pain. But if the news keeps getting "less bad," it will buck those expectations. And that means stocks could have an absolutely stellar year in 2023. You need to prepare for that possibility today... before the market soars. Good investing, Brett Eversole P.S. Few investors are taking this idea seriously. Almost no one believes that stocks could stage a surprise to the upside. But a shift is happening on Wall Street that makes it the likely outcome. The reason is based on nearly 100 years of data... And simple analysis points to a dramatic conclusion: Stocks could soar hundreds of percent over the next few years. That's why Dr. Steve Sjuggerud hosted an event on Tuesday night to share the full details. I hope you joined us... But if not, you can still watch the replay right here. Further Reading "The inflation 'boogeyman' of 2022 will be dead by March," Brett says. That might sound impossible. But the inflation rate is already declining fast. And if it continues falling at the current pace, we could see a stock market boom sooner than anyone expects... Learn more here. "This is the power of investing in markets that go from 'bad to less bad,'" Chris Igou writes. Once investors have given up, you don't need things to turn all the way around to "good" to make big gains. All it takes is a little improvement to spark a new rally... Read more here. |
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