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The next recession could happen sooner than we think

The next recession could happen sooner than we think

We are seeing the longest Standard & Poor’s (“S&P”) 500 equity market rally on record and key recession indicators suggest at least another two years of economic growth. But geopolitical risk is rising. Today, the International Monetary Fund cut its global growth forecasts, citing trade tensions. Could the next recession happen sooner than we think?
Right now, investors are shrugging off potential trade disruptions and the risk of an oil surge. Despite these significant geopolitical threats, such as when President Trump recently announced tariffs on an additional US$200 billion of Chinese products and warned he may extend to all, the S&P barely blinked.
Equity markets have historically struggled to reliably signal recessions. Over the last 80 years, in the final two years of a bull run, the S&P 500 has delivered an annual median return of 21%, or a cumulative 45%. In fact, the minimum cumulative return has been 30%. And the last year doesn’t end with a whimper: its minimum return has been 11%, with a median return of 21%. This late-cycle momentum explains why most investors stick with equities, even as economic fundamentals start to weaken.
So instead of relying on equity market signals, we use three other indicators that have shown impressive power in predicting recessions. When these indicators simultaneously show stress, they signaled the last seven recessions with an average lead time of five to six months. They seek to integrate the interplay of the business cycle, market dynamics and monetary policy.