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Market Insider: July 12, 2022

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U.S. Money Reserve

Jul 12, 2022

Oil prices fell over 10% during intraday trading on July 5, 2022. According to CNBC, this drop was fueled by fears that a possible recession could create a cutback in demand. This pullback in oil prices is just one of several indicators signaling a possible recession.

Another inversion in bond yields may also be signaling a recession.

The “yield curve” is defined as the relationship between the short- and long-term interest rates on bonds. Typically, long-term holders of debt expect to take on more risk, so long-term yields are higher. However, when short-term debt is considered riskier, its yields are higher than those of long-term debt. This is known as a “yield curve inversion.” According to research by the Federal Reserve Bank of San Francisco and reports by Fox Business, every recession of the past 60 years was preceded by a yield curve inversion.

The two- and ten-year yields inverted on July 5, 2022, possibly signaling a recession. This is the second time these yields have inverted this year, with the previous inversion taking place briefly on March 29, 2022.

Computer screen showing bond market information

The Atlanta Federal Reserve’s GDP tracker indicates that a recession may have already started.

The Atlanta Federal Reserve Bank’s GDPNow model, which provides estimates for gross domestic product (GDP) growth, indicated on July 1, 2022, that U.S. GDP contracted 2.1% in the second quarter of 2022. U.S. GDP previously contracted 1.6% in the first quarter of 2022.

Traditionally, a recession is defined as two consecutive quarters of economic decline, often measured by GDP, in conjunction with a rising unemployment rate. While this definition matches the current economic climate, the National Bureau of Economic Research (NBER) is often considered the authority on whether a recession has taken place, though it does not officially declare recessions until they have ended.

Downward-trending red arrow over image of $100 note

A recession could put further pressure on consumer portfolios.

A recession could affect equity markets, according to analysts from multiple banks. Strategists from Morgan Stanley, Wells Fargo, and Goldman Sachs have all separately warned that a coming recession could have a major negative impact on stocks. In a note published by Morgan Stanley on June 21, 2022, analysts estimated that the S&P 500 could plunge 20% below recent highs.

Economist Nouriel Roubini says stocks could drop 50%. In an op-ed piece published by MarketWatch on June 3, 2022, Roubini wrote, “Because the next recession will be both stagflationary and accompanied by a financial crisis, the crash in equity markets could be closer to 50%.”

If these signals are correct, consumer portfolios could soon be exposed to the effects of a recession.

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