Our next Festival is we are getting closer to a recession in the coming months and that October low not really the low let's bring canaccourage annuities Chief Market strategist 20 Tony Dwyer Tony great to see you so what kind of low are you bracing for so well why don't we just give it the data so you open the show with how the.
Two-year note yields it the highest of the cycle we look back since it's been at 500 stock indexes since 1957 and the S P 500 has never made the low of a cycle when it's down more than 19 percent before the two-year made its peak so with the two you're making the peak of the cycle so far that tells you that October law wasn't the law.
Okay so then in the notes you say that the higher the two-year yield goes the more likely we are headed into a recession so does that mean you see that in the cards at this point and so a recession does work to the markets I do Mel I think the soft Landing scenario was because you couldn't disprove the the data yet in other words you go you.
Don't go from super fast to a recession in a tick so it takes time to get there so what what we're basing our recession call on is the percentage of the yield curves that are inverted is at 80 almost 87 all you need is 55 of them to be inverted to get into a recession even the soft Landings of 1966 1995 and 2016 the composite leading economic.
Indicators were nowhere near um as weak as they are now anytime the leis have been here you've gone into recession and then lastly not just the money supply but the bank lending standards have tightened to a level that and the loan demand for seni loans are at a level that have been associated with recession so to me the data is.
There for recession we just haven't had enough time to get there yet hey Tony so this is obviously backward looking if you're you know you have the data here but do you have any sense of like when stock market in a bear market usually bottom in and around a recession because again you know this recession call by a lot of strategists and some investors.
Too has been pushed out a little bit you know a lot of people were saying just a couple weeks ago we're in a new bull market and the Bear's over so I'm just curious if you're right about the recession maybe in the back half of 2023 how do the stock markets usually bottom before recessions or in them damn it's a great question they've never bought them.
Before recession so the mean uh the median number of weeks from the beginning of the recession to the S P 500 low is 23 and a half weeks so that's why this whole call has been about the recession and why it's so important to use that data I mentioned earlier so we know that when the two years making a peak the s p is never made the low until.
After the two-year Peaks number one that means the October low isn't it and we also know that the market is never bottomed before the recession even began so I but what I want to do Mel if I can is be super clear here we're over a year into this bear Market I want to attack the next law you don't get Armageddon negative now we go back to that October.
Low and I want to attack it because it'll be when bad finally bad news will become bad news and that's typically when you make that recession-based low and what takes us out then Tony because I think well I mean you know we admire your work a great deal what takes us out from that like what are you going to attack on the on the aggressive side on.
The long side it's going to be the early cycle names of financials and the cyclical names though the economically sensitive names it's really interesting the soft Landing scenario to me is one of the it's not the best case scenario because we we don't have to guess we know exactly what's going to happen if you're in a soft Landing inflation is.
Going to remain elevated the FED is going to have to continue to tighten and the Market's gonna and risk is going to get hit we don't have to guess that's what happened over the last two weeks so I think I think what we really need is unfortunately to go into a recession to the point where the federal lower rates enough that a kick-starts a credit cycle.
To Karen's Point not now when it's when we're about to enter a potential negative credit cycle so Tony how does the FED pivoting if at all factor into this sort of recessionary overlay I mean a lot of strategies or I don't want to say a lot but some are banking on some Market participants certainly banking on.
Some sort of a pivot some sort of cutting um you know later on this year or maybe early next year does that play into this at all and and does that change your outlook for when the market bottoms it doesn't Mel only because when I look back the only time that I can find after a tightening cycle where the fed pivoted.
And it was the low was in 1995. um the last rate hike happened I believe in February of 95 the market was already ripping and it just kept going straight up for the year I think it was a 34 percent year so when when you look at that it really comes down to you've got it you've gotta go have the unemployment rate pick up and you know you're in a.
Recession historically when the unemployment rate is is um a half a percent for an average at three months above the low so if we get a 3.9 unemployment rate we know we're in a recession if we know we're in a recession we know we should be able to be about to make the low and that creates the opportunity for a real.
Sustainable bull market and a change in that money the problem is money it's not it's not just the thought of money there's there's the money system is shut down Tony great to see you thanks great to see you Mel thanks guys Tony Dwyer count of continuity um you know some more bullish people.
Might have argued that the markets had looked through this that the October low was them pricing in the recession that was yet to come because it's a forward-looking mechanism did you ever buy that Courtney I think there's parts of the market that are going to continue to do well right I think it's it's hard to look at the market as a whole and I.
Do think it's hard because we're looking at talking the soft Landing or the hard landing and the big Crux there is what's going to happen with unemployment and I still do find it tough to see where we're going to get to that higher unemployment right now because you're seeing like even fascinating today we saw Home Depot came out and nobody liked.
Their earnings but they're hiring more people and increasing their wages so that you have a lot of that happening industry so yes you have your big Tech firms who are laying off but there's still plenty of parts of the country who can't hire enough people and so I don't know what the catalyst is to get there to bring unemployment up enough to bring.
Us to the recession to bring us to a harder landing and yes it's a possibility but I you know I'm not convinced it's happening yeah Karen I agree I think I mean to me the employment thing is a big it used to be I mean 3.4 was absolutely well below what maximum employment used to be right four handle middle fours maybe so I.
Would think that this economy can withstand some meaningful move in employment that actually would that would help the feds no it help it hurts the FED story it makes it so much harder for them to get you know like it basically means that fed funds is going to have a five handle for much longer.
Than I think the stock market can endure at the valuations it is at and just the other thing I mean like what if more unemployment remains depressed is it oh is that what you're saying okay I said yeah I just think it makes it makes the fed's job really hard I know you feel the same way I mean it's just I just think it's just you know it's one of.
Those things that and let's just be frank okay we talked about Chipotle a couple weeks ago they're hiring 15 000 workers in North America these are workers they can fire so quickly and they will fire so quickly if there is a recession so I mean to me I I just think that with unemployment if we still get hot readings and we have unemployment.
Below three and a half percent or so it makes the fed's job that much harder I agree I was saying if in uh if unemployment Rises but yeah but she's saying that it's going to stay low forever right is that what you're saying like you think that the you know we can actually have a soft or no Landing because unemployment is not going to go.
Up I can see employment staying lower for longer correct but you're right it does make the feds drop harder which why we probably are going to have higher interest rates for longer and that's exactly where you need to look at the markets all these longer duration assets are going to continue to be under pressure so yes I think we're saying the.
Same I mean for June 5.3 percent is where fed funds sit right now three weeks ago is 4.9 or something I mean like the the change in Psychology which is probably what the markets need it's it's amazingly fast and it's exactly right it's exactly what they need it's sort of like to come to Jesus moment where they realize wait a second we're.
Not going to get out of this situation as fast as we want to I'm with you I don't think unemployment is going to move me they they the Federal Reserve I think they want a five-handle they would never say that that's what they need they're not going to get it and that's the problem I mean because wage growth continues inflation is a problem you're.
Going to see it in the numbers later this week and they're trying to combat something that everybody seems to think is an easy fix it's not that easy which is why rates are going to stay higher for longer and people just starting to come that realization now
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twelve months-over-year inflation stood at 6.5% in December 2022—the bottom that figure has been in additional than a year. Inflation became essentially essentially based entirely on what economists anticipated and gave many of them a motive to judge that the peak of inflation might possibly be behind us. I essentially possess approximately $150k stagnant in my port_folio that wants hiss. What’s the one intention to capture income of this downturn?
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