This essay was originally published in DailyWealth Trader, a daily trading advisory. To learn more about this service, click here.
Three Data Points Say the Recession Is Already Here By Chris Igou, editor, DailyWealth Trader
The first quarter of 2023 saw the highest number of U.S. bankruptcy filings in more than a decade... There have been 183 bankruptcy filings for U.S. companies as of March 31. And 71 of those were in March alone... This round of bankruptcies is likely just the beginning. It seems we've reached the first stages of the "hard landing" recession... Today, we'll dig into the data behind the new wave of bankruptcies. And we'll discuss how they fit into a larger hard-landing narrative. Let's get into it... We can see monthly bankruptcies thanks to a tracker published by S&P Global Market Intelligence. But only certain companies get counted... It has to be a public company (or a private company with public debt) possessing $2 million in assets or liabilities. Or the company can be private with $10 million in assets or liabilities. According to S&P Global Market Intelligence, bankruptcies have trended higher for the past four consecutive months. They've also been up every quarter since the summer of 2022. Take a look...  In other words, weak businesses are now failing in the tightening economic environment. It's a textbook symptom of recession – and we can see it if we look at the Bloomberg Corporate Bankruptcy Index. The Bankruptcy Index uses different criteria than the S&P Global Market Intelligence data. So it doesn't show the same March spike in filings... Still, take a look at how the index behaved through three recent recessions (indicated by shaded bands)... 
In all three examples, the index rises to tip off the recession – and then spikes (sometimes repeatedly) once the recession hits. That's because as rates rise, lending standards tighten. The flow of money gets choked, so weaker companies fail and go bankrupt. Then unemployment soars – and the hard landing is on. And a second data set suggests the new surge in bankruptcies is more than just noise... Peer-based business research group The Conference Board has modeled the probability of a U.S. recession each quarter going back to 2007. Today, it puts the chances at 99%. Take a look... 
The Conference Board has only been this confident in a recession two times in the past – once when we were in a recession and once when one was already ending. Together, these three charts paint an ominous picture for the economy. If we are indeed in a recession and the Bankruptcy Index is a guide, the spike in bankruptcy filings may just be starting. This could well be the catalyst that sends the market back toward new lows in the near term. If that's the case, you want to be ready for that market environment... That means you should play defense and be extremely selective about which bullish positions you choose. In short, stay nimble and keep defensive. That's how we'll maneuver our way through this hard landing. Good investing, Chris Igou Further Reading "Tough economic times ahead are near certain," Brett Eversole writes. "But if you can take a long-term view, now is a great time to buy stocks." That's because near-term financial stress can create longer-term opportunities – and the data shows it... Learn more here. "The economy is moving away from the modern crop of growth-obsessed CEOs," Dr. David Eifrig explains. "Instead, the markets are poised for a turn toward real profits." As money tightens, a certain type of business is set to outperform... Read more here. |
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