Suncor Energy Inc T.SU

Probability of a recession in the US

[Torontojay]

As an investor, it is important to understand there are no guarantees for any event to occur, only probabilities matter and it could help you navigate through turbulent times. 

 

I've decided to investigate the likelihood the US will fall into a recession based on some historical accounts using Fed Funds and the yield curve. 

Since going back to 1957, there has been 12 major Fed hiking cycles of which 9 of them have caused recessions. There are 3 years worth noting where a soft landing occurred and this would be 1966, 1984 and 1995. In each of these years, the yield curve did not invert; that is, the 10 year treasury yield remained above the 3 month t-bill.  It is fair to say that using bond yields and measuring the spread between the long and short end is the best predictor of an economic downturn we have. Anytime this happens, investors should remain cautious. We are now past 13 months in which the yield curve has remained inverted and yet we still don't have a recession. This has happened only one other time in history and that's the 16 month lag it took for the recession to arrive during the GFC. We have now entered the 14 month and so if the recession does not arrive by February (if it does) then it would have surpassed the longest of lags in recorded history. It doesn't mean it's not going to happen but that the lags could possibly be longer this time. Who knows? If we use the yield curve as an indicator, then the recession should have happened by now. 

The probability that the US enters a recession during this hiking cycle is about 50% using the last rate hike to a Fed pivot as a reference using historical accounts. That is, out of the last 12 hiking cycles since 1957, 6 times a recession occurred after the Fed's last interest rate hike, 3 times the recession never happened and 5 out of 9 times it did on the condition that a recession occurred. When the Fed cuts interest rates, the recession still occurred 5 out of 12 times and it begins to tilt in favour of a no recession happening. Next year should be very interesting as I think the Fed is halfway there but they still have more work to do.

[Experienced]

Jay...I will comment on your past few posts with some thoughts Your comment regarding fixed income is well taken.  I have posted here on a couple of other Boards that in terms of asset allocation I am overweighted in fixed income assets in terms of preferred shares of big cap names such as ENB.  As preferred shares these investments are low risk and I bought many of them with a yield of

[Torontojay]

Great points Experienced! You and I share the same viewpoints on the economy. It looks like animal spirits are raging back and everyone is in the "no recession" camp now. This is precisely the time to be a contrarian and think about adding some t-bills or some type of fixed income to your portfolio. 

[Marty47]

I put a lot in short term canadien etf and American bond etf , the yield was nice and as the interest stay longer up , the etf repurchase new bonds with bigger yield , already 10% up in 4 months .....for my oil investment as I said before , geopolitics will drive oil up ...... Iran will pump the price using their puppets houthis , as long Israel stay in gaza oil will go up .... 

[Experienced]

Good for you Marty!! Thumbs up... Over the years, I have seen too many people ignore the usefulness of fixed income investments at certain times over the business cycle.  Like anything in life, it is important to have a full toolkit and use the right mix of tools to get the job done.