Coming into 2022, there were few investors advocating for a bear market. (We were very cautious. See here: A Return To Regular Order? (forbes.com)). Consensus then was that the Fed would soon rein in ‘transitory’ inflation, earnings would stay strong even if they reverted from euphoric estimates, and that bond yields would ease off their rise from the covid bottom. Camp Consensus pitched their tents in the wrong spot as 2022 was a brutal year for equity and fixed income markets. For 2023 the consensus has switched about 180 degrees as it seems that almost unanimously investors and pundits are calling for an imminent recession. There has never been as many professional forecasters calling for recession as there are now. So, what could the bull case be?
No doubt, everyone knows that there is an inverted yield curve today. An inverted yield curve occurs when multiple shorter dated maturities sit at higher yields than longer dated maturities. Conventional market wisdom says that an inverted yield curve has predicted every recession in the United States, going back to the 1950’s. This we find to be correct, every single recession has been led, by varying degrees of time, by inversions of the government bond yield curve. Let’s ask a different question: has an inverted yield curve always led to a recession? the answer is no, by a N of 1, in 1966.
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