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Recession Watch – Revisited

Despite historically high inflation, a very hawkish Fed, still snarled supply chains and the awful events in Eastern Europe, we remained more optimistic than not on the US economy as we moved through 2022, a point of view that we think has largely been proven correct (we recognize GDP contracted by 1.1% during the first half of 2022, but GDP expanded by 2.9% in Q3, and the economy is heading into year-end on reasonably solid footing).

That said, six weeks ago we published a Weekly Wire titled “Recession Watch,” making the case that an economic downturn had become more likely. To back up just a bit, we know that an inverted yield curve is a historic harbinger of a US recession. That said, we don’t think all parts of the curve are created equally when it comes to their predictive power. More specifically, into late October, the US 2 Year Note to US 10 Year Note part of the yield curve had been inverted for some time but the US 3 Month Bill to US 10 Year Note part of the curve (which for our money is the most important part of the curve from an economic forecasting perspective) had not inverted. Then, in late October, the US 3 Month Bill to US 10 Year Note part of the curve did invert, and we took pen to paper on our “Recession Watch” note.

Well, as we move into mid-December, the US 3 Month Bill to US 10 Year Note part of the curve is upside down by approximately 85bps, the most ever (see graph). A US recession is not pre-ordained, but the yield curve and other key indicators, including money supply and The Conference Board Leading Economic Index, point in that direction. While we are cautious on the outlook for the economy next year, we are optimistic on the outlook for US stocks and bonds next year, believing sentiment, valuation and a more dovish policy posture at the Fed should support higher prices for both asset classes as we move through 2023.

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The views expressed are those of Brinker Capital and are not intended as investment advice or recommendation. For informational purposes only. Brinker Capital Investments, LLC, a registered investment advisor. 2401-BCI-12/12/2022

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