How to Spot the 'Official' Recession Yourself

Reasonable takes are great... Waiting on a recession... How to spot an 'official' recession yourself... Why it matters... Three things to watch... The outlook for stocks, bonds, and gold...

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 'Hot takes' are overrated...

The mainstream financial media loves sound bites and quick-hit opinions... Instead of these hot takes, I (Corey McLaughlin) am a fan of "reasonable takes."

Reasonable takes aren't salacious. They might not help sell advertising time. But when you're in the markets as an investor rather than a gambler, they're far more valuable.

The talking heads often deliver biased opinions based on their interest or disinterest in the trade, company, or story at hand. If you're glued to the TV, you might not ever hear the more helpful stuff... or you'll get it way too late.

I'm talking about the indicators worth following that we at Stansberry Research love to share... or how to spot a "zombie" business... or what to look for in a good company... or practical advice for spotting a recession.

I want to talk about this last reasonable take today...

It feels like so many people are just waiting for an 'official' recession...

But I've rarely heard anyone talk about how to spot it... or whether it even matters for stocks. We'll explore both ideas today.

As we said last month, there's enough evidence that a recession is already underway, given the slowing rate of consumer spending in the U.S., for one major thing. There's also the often-forgotten but hardly insignificant fact that we also had a recession in the first half of 2022 when gross domestic product ("GDP") declined for two straight quarters.

Based on these factors, you could argue that the markets long ago "priced in" a recession... But back at the start of 2022, though, unemployment was near a record low, as it still is now. So the self-proclaimed "official" recession callers at the National Bureau of Economic Research ("NBER") haven't said that U.S. economic activity is contracting just yet.

But it did, and it looks like it's starting to again... And the next recession isn't going to be up for debate.

Plus, as much as we don't like it, an "official" recession call matters, historically speaking...

The label colors sentiment in the investing and business environment. Practically, it means credit conditions will be tight. And as our friend and colleague Mike DiBiase wrote here several weeks ago, looking back at history, it becomes clear that the U.S. stock market "never bottoms before recessions. It bottoms during or after recessions."

In the April 26 Digest, Mike shared this chart of the S&P 500 Index since 1980, with gray areas indicating official recessions...

As he reminded us...

We're not even in an official recession yet. Most are predicting it won't start until later this year. That means the stock market bottom is still in front of us.

And those gray-shaded areas aren't made "official" until well after a recession has begun or ended. According to the NBER's Business Cycle Dating Committee's explanation of how it picks out "peaks" and "troughs" in the economy...

The committee's approach to determining the dates of turning points is retrospective. In making its peak and trough announcements, it waits until sufficient data are available to avoid the need for major revisions to the business cycle chronology. In determining the date of a peak in activity, it waits until it is confident that a recession has occurred.

In other words, if you're waiting for mainstream officials to tell you on television that a recession is here, by then it will be obvious enough to everyone. And if they only announce the recession once the downturn is ending, you'll hear it exactly when the information will be least useful or most confusing for making forward-looking investment decisions.

When the sky is falling and your neighbor starts talking about how bad this recession is, that's around the moment you'll probably want to be buying stocks. In today's environment, you'll also want other assets like bonds and gold... especially if the Federal Reserve responds to a recession in its usual fashion of cutting interest rates.

So, here's one man's practical advice for spotting a recession...

With all this being said, one of the more useful exercises worth doing the rest of the year is to spot the recession yourself. It might sound daunting. But veteran investor Tony Dwyer, who has 30 years in the markets and is the chief market strategist for Canada-based Canaccord Genuity, recently shared two simple indicators to watch...

Admittedly, you might see Dwyer on CNBC occasionally, but not giving "hot takes." And he also talks elsewhere, such as non-mainstream podcasts like The Compound and Friends, where we heard this discussion...

Dwyer noted that...

1. Stocks typically haven't bottomed until 23.5 weeks after the start of a recession.

2. A recession won't begin until yield curves turn positive and the Fed starts cutting rates, not just pausing them. (Right now, for instance, the 10-year/2-year spread is still at negative 0.48%.)

3. An "official" recession won't be called until the unemployment rate rises over a sustained period. This isn't happening yet... Unemployment in April actually dropped a little to 3.4%.

On the third point, Dwyer said you'll know we're in a soon-to-be-called recession when the unemployment rate averages 50 basis points, or 0.5 percentage points, higher than the low of the cycle for three straight months.

Using current numbers and timing, that would mean to watch for when unemployment hits 3.9% for three straight months, as the most recent unemployment data for April checked in at 3.4%. (This is called the Sahm Rule in finance circles. It's named for Claudia Sahm, a former Fed economist and not coincidentally a member of the NBER.)

That's the point where Dwyer expects the Fed will be inclined to start cutting rates, or "pivot."

That'll be bad news...

A Fed pivot might sound like good news after 10 rate hikes over the past 14 months... And, indeed, history has shown a short-term bounce for stocks immediately after a Fed pivot. But these turns in rate policy have traditionally not been a buy signal for longer durations. Instead, they've been a sign of more pain for stocks because it means a recession is coming or already happening.

Remember, as we've also said many times, every bear market since 1955 hasn't ended until after the Fed has started to cut rates. This is a reason why. As Dwyer said...

The final leg lower is when you're in that recession and you're going to make "the" low.

We will keep close eyes on signs for this "final leg" developing, but it might take a while. It's also worth noting the only time a Fed pivot was a buy signal was in 1995. In that case, the pivot came with no recession, a circumstance also worth considering.

If that's enough to make your head spin, we'll try to give some clear takeaways...

First, yes, the hit-you-over-the-head "official" recession call does matter. And until it arrives, we might not have seen the final leg down for stocks in this bear market just yet. But that also doesn't mean you don't want to own any stocks at all.

You can also think of it this way...

If you're a believer that we had a recession in the first half of 2022, like declining GDP suggested, it would fit with historical precedent that stocks "bottomed" in October after it. You may remember that I said my "bottom is (probably) in" indicators suggested this to be the case, but that's all in the past now. We need to look ahead from this moment in time and within current circumstances.

It would also make sense that if another recession strikes, one with rising unemployment and a slowing economy, more trouble could be ahead for stocks that stock prices haven't reflected just yet.

Now, that doesn't mean you can't make money in the meantime...

No matter what happens – whether stocks rise, fall, or continue to move sideways – owning shares of high-quality stocks that reward shareholders with dividends will benefit you.

And let's not get too far ahead of ourselves. We're likely in the early stages of "pause" territory from the Fed. This story could take a year to play out.

Just today, our colleague Brett Eversole wrote in the free DailyWealth newsletter that Fed "pauses" have been followed by good returns for stocks, like 20% on average over 12 months in the Fed's past six rate-hike cycles... So, counterintuitively, now might be a good time to buy, while also knowing downside could be ahead if or when a recession arrives.

At that point, the Fed will probably pivot, which then won't be good for stocks because it means the economy will be on shaky ground. At the same time, though, a Fed that is cutting rates could be good for gold and bond prices.

John Doody, editor of Gold Stock Analyst, wrote about this just yesterday in his monthly issue, while making a convincing case for another long bull run for gold ahead... and a case for bonds, too. John wrote...

How does the Fed react to a recession? It lowers interest rates...

With inflation still high, this would be a tailwind for gold prices, John explained. Plus, he said, lower rates would also "put value back into bond portfolios, and allow banks to keep lending."

I can't tell you precisely what's going to happen next. But I brought all of this up today because I do think it's important to understand the context of what could come next.

If you do this and then apply the thinking to your own goals, portfolio, and time horizon, I'm confident you'll rest easier, which is priceless. It will also be a heck of a lot more refreshing to mute the television, too.

New 52-week highs (as of 5/8/23): Alamos Gold (AGI), AutoZone (AZO), Copart (CPRT), Enstar (ESGR), iShares MSCI Mexico Fund (EWW), Franco-Nevada (FNV), General Mills (GIS), iShares U.S. Home Construction Fund (ITB), Eli Lilly (LLY), London Stock Exchange Group (LNSTY), Novartis (NVS), OMRON (OMRNY), O'Reilly Automotive (ORLY), PulteGroup (PHM), Revance Therapeutics (RVNC), Seabridge Gold (SA), Spotify Technology (SPOT), and Torex Gold Resources (TORXF).

In today's mailbag, feedback on the comments from a Federal Reserve official that we reported on yesterday... some thoughts on the debt ceiling... and more about our recent coverage, including my take on the Bank of England chief economist recently suggesting people need to "accept" being poorer... Do you have a comment or question? As always, e-mail us at feedback@stansberryresearch.com.

"With their continued interest rate hikes in the face of the banking crisis, I think they want to cause some sort of market/banking crisis. Why else would you raise the rate with the regional banks struggling? They could have at least paused, to let things settle down." – Paid-up subscriber Tim W.

"The U.S. government is functionally bankrupt by any standard applied to corporations, small businesses, and individual households. If we applied the Free Cash Flow process used in examining equities, Congress and the Administrations of the past two decades would be lumped in the same cell with Bernie Madoff, Enron, and WorldCom." – Paid-up subscriber Edward E.

"You guys are better than I expected... I guess my life finally slowed down enough where I could take a look at your newsletter after getting it sent to me many months. Wow, impressive. I love seeing bankruptcies being covered when none of my other sources are covering it. Now I will tune in weekly. Thank you." – Paid-up subscriber Joe S.

Corey McLaughlin comment: Thanks, Joe, I think! Here in the Digest, we're here every day the markets are open, and weekends too. Don't be a stranger...

"Mr. McLaughlin gets it, at least in his latest oratory. As an Alliance member, I've been optimistically taking financial advice based on how much I think the writer/advisor at Stansberry fully understands the dire state of tyrannical control that is being warred on us, the average American retail investor, and freedom-loving Americans at large... Unless an advisor fully understands the state of our Republic, and the current attack upon it, how can a serious investor trust the advice? Current mainstream financiers paint a picture that is either a lie, or simply based on manipulated data. I came to Stansberry because I am not scared of the truth, and I faithfully believe they are not timid either. Mr. McLaughlin gives me hope that he understands what is happening, and most importantly, he is not afraid to report it. God bless him, and us all." – Stansberry Alliance member J.C.W.

McLaughlin comment: Thanks for the note and your trust. We don't take it lightly.

When it comes to decisions (made by governments) and systems (like the financial one) that affect the general public in ways many may or may not understand, I'm a big believer that the more independent information people have, the better. It's a big reason I do this every day.

All the best,

Corey McLaughlin
Baltimore, Maryland
May 9, 2023