Steno Signals #58 – Rebound or recession? Or both?
Happy Sunday and welcome to our flagship editorial!
We have spent the last week studying the business cycle intensively to gauge how various asset classes look at the cycle right now. It is safe to say that nothing has been normal in this post-Covid “cycle” and that is probably exactly the reason why we are currently stuck in a debate on whether the economy rebounds or goes into a recession.
Let’s have a look at the evidence.
Rebound or recession? Consensus needs to turn much more upbeat before a recession is worth betting on
The recession has been postponed and postponed and postponed by the economic consensus in recent quarters and advisors and fund managers have been positioned for economic weakness for too long.
Our quant-based recession probability model entered the year with a relatively benign recession risk of 20-25%, which led us to buy risk assets when everyone was negative during January of 2023.
Our recession indicator is starting to hint of much more elevated risks during Q3 and Q4 in particular, but why is the market chasing a cyclical rebound if the recession risk is still very present?
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Chart 1: Steno Research recession indicator (with exact timings of empirical lags)