Market Moves Suggest a Recession Is Unavoidable

(Bloomberg Opinion) -- As a longtime market observer, what I find most interesting about the latest correction in equities has the feeling of inevitability that it will turn into something worse. It wasn't this way in late January, when everyone wanted to buy that dip. It certainly wasn't this way in 2007, when the magnitude of the recession was grossly underestimated.

Even the Federal Reserve is getting into the pessimism. Chairman Jerome Powell signaled last week that a pause in interest-rate hikes might be forthcoming. What's interesting about that is Powell surely knew that such a reference might be interpreted as bowing to pressure from President Donald Trump and yet he did it anyway. In essence, he risked the perception of the Fed's independence probably because he knows the economic data is worsening.

Just about everyone I talk to in the capital markets, including erstwhile bulls, acknowledges that things are slowing down. Yes, the Institute for Supply Management's monthly manufacturing index released earlier this week was strong, but jobless claims are ticking up and I am hearing anecdotal reports of a wide range of businesses slowing down. Even my own business is slowing. Anecdotes aside, oil has crashed, home builder stocks have been crushed, and the largest tech stocks in the world have taken a haircut. If we get a recession from this, it will be a very well-telegraphed recession. Everyone knows it is coming.

A recession is nothing to fear. We have lost sight of the fact that a recession has cleansing properties, helping to right the wrong of the billions of dollars allocated to bad businesses while getting people refocused on investing in profitable enterprises. Stock market bears are so disliked because it seems as though they actually desire a recession and for people to get hurt financially. In a way, they are rooting for a recession because they know that the down part of the cycle is necessary.

There are signs that capital has been incorrectly allocated. In just in the span of a year, there have been three separate bubbles: one in bitcoin, one in cannabis and one in the FAANG group of stocks: Facebook, Apple,, Netflix and Google-parent Alphabet. This is uncommon. I begged the Fed to take the punch bowl away, and it eventually did, and now yields of around 2.5 percent on risk-free money are enough to get people rethinking their allocation to risk.

Yet, I wonder if it is possible to have a recession when so many people expect one. The worst recessions are the ones that people don't see coming. In 2011, during the European debt crisis, most people were predicting financial markets Armageddon. It ended up being a smallish bear market, with the S&P 500 Index down about 21 percent on an intraday basis between July and October of that year. It actually sparked a huge bull market in the very asset class that people were worried about: European sovereign debt. We may one day have a reprise of that crisis, but if you succumbed to the panic at the time, it was a missed opportunity.

But just the other day, the front end of the U.S. Treasury yield curve inverted, with two- and three-year note yields rising above five-year note yields. Everyone knows that inverted yield curves are the most reliable recession indicators. Of course, the broader yield curve as measured by the difference between two- and 10-year yields or even the gap between the federal funds rate and 10-year yields has yet to invert, but as I said before, there is an air of inevitability about it. Flattening yield curves always precede economic weakness. They aren't much good at exactly timing the top of the stock market, but you can get in the ballpark.

I suppose all recessions are a surprise to some extent. If you are a retail investor getting your news from popular websites or TV channels, you might not be getting the whole picture. In the professional community, it is becoming harder to ignore the very obvious warning signs that a downturn is coming. In bull markets, everything works. In bear markets, the only thing that really works is short-term government and municipal bonds and cash. Ample opportunity is being given to cut exposure to risk, and it's clear that few people are taking advantage of it. They never do.

To contact the author of this story: Jared Dillian at

To contact the editor responsible for this story: Robert Burgess at

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Jared Dillian is the editor and publisher of The Daily Dirtnap, investment strategist at Mauldin Economics, and the author of "Street Freak" and "All the Evil of This World." He may have a stake in the areas he writes about.

For more articles like this, please visit us at

©2018 Bloomberg L.P.


More Related News

Wall St. Week Ahead: May be time for growth to run out of gas
Wall St. Week Ahead: May be time for growth to run out of gas

A return to fashion of growth stocks in 2019 helped lead the overall market out of a year-end shakeout, but another multi-year run of growth performing better than value may not be in the cards. During that time the Russell 1000 Growth index has fared even better with a gain of almost 20 percent while the Russell 1000 Value index has lagged with a gain of about 17 percent. Growth investors typically search for companies that have higher profit growth and margins, while value investors look for stocks that seem inexpensive.

A Fed pivot, born of volatility, missteps, and new economic reality
A Fed pivot, born of volatility, missteps, and new economic reality

The Federal Reserve's promise in January to be "patient" about further interest rate hikes, putting a three-year-old process of policy tightening on hold, calmed markets after weeks of turmoil that wiped out trillions of dollars of household wealth. Along with Powell's public comments, Fed minutes, and other documents, the picture emerges of a central bank edging towards a period of potentially difficult change as it reviews how to do business in light of that new reality. "We're a long way from neutral now, probably," Powell said at a Washington think-tank event, referring to a level of interest rates that neither cool or boost the economy.

Dow Plunges 103 Points While Analysts Spar over Trade War
Dow Plunges 103 Points While Analysts Spar over Trade War's Impact on US Stock Market

Thursday's closing bell couldn't come soon enough for the US stock market, which plunged across the board and prevented the Dow from crossing the 26,000 point threshold. Dow Recovers 80 Points But Still Sees Triple-Digit Loss The Dow Jones Industrial Average plunged by 103.81 points for the day, falling 0.4 percent to 25,850.63. Losses were fairly evenly distributed throughout the stock market's other two major indices as well, as the S&P 500 and Nasdaq dropped by 0.35 percent and 0.39 percent, respectively. The market did pare losses in the minutes before the closing bell, enabling the Dow to recover by

These 2 Surging Stocks Are Still Buys
These 2 Surging Stocks Are Still Buys

More gains could be coming for these still-cheap stocks.

Leave a Comment

Your email address will not be published. Required fields are marked with *

Cancel reply


  • Jeaenerry
    (2018-12-23 19:46:49Z)

    How To Get Viagra Fast Cialis Argentina [url=]cialis cheapest online prices[/url] Order Plavix Cialis 10mg Competencia De Kamagra Amoxil 62.5 Mg Variations In Enzymes In Amoxicillin Overdose [url=]generic viagra[/url] Xenical Generique Where To Buy Penicillin Vk Online? Viagra Bestellen Anoniem Cheap Viagra Super Active Levitra 10 Mg Acquisto Cephalexin Nursing Mother [url=]viagra[/url] Viagra Y Sertralina Comparaison Viagra Tadalafil Levitra Levitra Anwendung Wirkung Kamagra En Ligne Avis Viagra Migrana Generic Amoxil Oral Drops [url=]cialis without a doctor's prescription[/url] Buy Valtrex In Thailand Cialis Vendre [url=]cialis no prescription[/url] Viagra Online Vancouver Cialis 20 Efficace Cialis 20mg Von Lilly


Top News: Economy

Hit "Like"
Don't miss any important news
Thanks, you don't need to show me this anymore.