Recession Timeframe Horizon

10 jul 2023

Macro Monday (2)

Potential Recession Time Horizon

Below you will find a breakdown of how many months pass before a confirmed Economic Recession (shaded grey areas) after the yield curves first definitive turn back up towards the 0% level:

1) 13 Months (Dec 1978 – Jan 1980)
2) 9 Months (Nov 1980 – July 1981)
3) 16 Months (Mar 1989 – Jul 1990)
4) 12 Months (Mar 2000 – Mar 2001)
5) 22 Months (Feb 2006 – Dec 2007)
6) 6 Months (Aug 2019 – Mar 2020)
7) 4 Months so far (Mar 2023 - ????)

Average Time frame: 13 months (reasonable time horizon would be 6 – 18 months).

I consider the first definitive turn up towards the 0% level as no. 7 on the chart (March 2023). Since this date we have rolled over below the -1% level (see additional chart in comments). March 2023 appears similar to the bounce in Dec 1978 (No. 1 in the chart), it also rolled over to the lower sub -1% level. If we assumed a similar 13 month timeframe to recession commencement as in Dec 1978 of 13 months, which also aligns with our 13 month average above, we would be looking at April 2024 for a recession to commence. Interestingly 1978 - 1980 was a similar peak inflationary period known as the Great Inflation, a defining macroeconomic period of high inflation.

You might be wondering, has a recession ever occurred in the month of April before? I personally thought this was a strange month but it has occurred in the past.

In April 1960 a recession commenced and lasted 10 months to February 1961. The 1960 recession was mainly a result of an over-tight monetary policy whereby the Federal Reserve raised interest rates from 1.75% in mid-1958 to 4% by the end of 1959 and maintained them at that level until June 1960. The Federal Reserves motive for raising interest rates and maintaining them was fear of high inflation (as in early 1951 inflation soared to +9.5%). Is it just me or is this all starting to sound a little too familiar?

If we wanted to cater for all time scenarios in the chart and noted above (no. 1 - 6) we could argue that the start of a recession is possible at the earliest within 6 months (Sept 2023) and at the latest 22 months (Jan 2025). Also, the month of April 2024 has some eerie similarities to two prior recessions, the 1978 and 1960 Recessions.

Lucky 13

Since World War 2 bear markets have on average taken about 13 months to reach their bottom and a further 26 months to recover their losses. Our average time before a recession would start is 13 months. It’s worth remembering that it could take an additional 13 months before a bottom is established and then 2 years or 26 months (2 x 13) of price action below the pre-recession price highs. Over 3 years is a long time to wait to recover losses. It would be pertinent to start deleveraging or increasing your hedge from the 6 month mark (Sept 2023 in this case) as subsequently the likelihood of a 3 year period below the Sept 2023 price levels increase as each month passes. For reference the S&P 500 index has fallen an average of 33% during bear markets over the avg. timeframe of 13 months to the bottom.

I actually find it very hard to accept that a recession is possible in the near term (within 6 - 12 months) and I would in fact argue against it, however I cannot explain away the data in the chart which speaks for itself and warrants at least some consideration & caution. Nothing is a guarantee and maybe this time it will be different, especially factoring in the amount of unprecedented liquidity added to the market in recent years, sticky inflation and financial supports provided to systemically important banks.

All the chart really indicates is a probable window for a recession to start some time between Sept 2023 – Jan 2025 and no guarantees.

The rule of 13 is worth remembering, simply from a timing perspective (before and during a recession) as it may help your timing. Based on two similar periods in history, the 1978 and 1960 recessions suggest the month of April 2024 may be a key date. Again, no guarantees.

It is also worth noting that for the last six recessions, on average, the announcement of when a recession started was up to 8 months after the fact…meaning we will have no direct indication when a recession starts, however the un-inversion of the yield curve (back above the 0% level) and a rise in unemployment will be the early tells, so these are worth paying attention too. We will keep you posted on any sudden changes in these metrics.

I hope the chart is helpful, provides one perspective of which there are many, and can help time and frame the situation we currently find ourselves in. NO GAURANTEES, just probable timeframes that may be worth paying attention too.

PUKA

List of Recessions:
1. COVID-19 Recession (February - April 2020)
2. The Great Recession of 2008 (December 2007 - June 2009)
3. The September 11 Recession (March - November 2001)
4. The Gulf War Recession (July 1990 - March 1991)
5. The Iran/Energy Crisis Recession (July 1981 - November 1982)
6. The Energy Crisis Recession (January - July 1980)
7. The Nixon Recession (December 1969 - November 1970)
8. The “Rolling Adjustment” Recession (April 1960 - February 1961)
9. The Eisenhower Recession (August 1957 - April 1958)
10. The Post-Korean War Recession (July 1953 - May 1954)