Our internal recession model has been flashing red for a while, and although lots of progress has been made vs. inflation the US economy has held up very, very while. Double checking our model here against a well-proven external source: the Senior Lending Officer Opinion Survey.
The survey of leading economic indicators (LEI for short) is flashing “recession” and this shouldn’t be ignored. Over the past 50 years, the LEI data has retreated by at least-10% only five other times and each of those were accompanied by recession. Over the past 18 months, the LEI has now fallen by -11%……we’ve got our sixth time now. I think we’ll find out in March 2024 that the US economy was actually in recession in December 2023.
The recent fall in UST yields is consistent with this view, as is the growing market consensus that the Fed rate hiking cycle is now complete. Recessions are normal parts of economic cycles. Expect the unemployment rate to continue to rise and the Fed to continue to “pause” on rates. Stay away from traditional high yield credit. It’s not cheap enough yet and that’s where all the bond defaults will happen when economic slowing actually morphs into economic stopping. Overweight quality and enjoy today’s 5% risk free rates because I don’t think they will be at this level in 6-12 months. I believe that next Fed move will be in mid-2024 and it’ll be a rate cut, not a rate hike.
Source: EISI as of November 20, 2023
Chief Investment Officer
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