To The Moon

After the gradually subsided banking crisis happened in March, the US stock $S&P 500(.SPX)$ market continued to rebound so far.

Investors are still rushing to buy despite a slew of U.S. economic data released this month pointing to recessionary signals and an expected sharp drop in Q1 corporate earnings.

On Thursday, the PPI unexpectedly fell sharply, the number of jobless claims rebounded, the market expected to cut interest rates within this year, the U.S. debt and the $USD Index(USDindex.FOREX)$ fell, and the market rebounded.

Is now really a good time to buy US stocks?

Bank of America investment strategist Jared Woodard pointed out that there are three signals of economic recession, based on the inspection of the history of economic recession in the past 150 years, two of which have already appeared. Next, the US stock market may usher in catastrophic consequences.

Recession: What Is It and What Causes It

Specifically, the three recession signals are as follows:

1. Steepening of the U.S. bond yield curve (has already occurred)

The yield curve measures the difference between short-term and long-term bond yields. At present, the $US2Y(US2Y.BOND)$ is firmly above 4%, while the $US10Y(US10Y.BOND)$ yield is 3.43%, showing a continuous inversion. Generally, the longer the duration of the bond, the more uncertain risk factors investors face during the period, so the yield of long-term bonds is often higher than that of short-term bonds.

Analysts at Bank of America pointed out that an inverted yield curve often means that a recession is imminent. Eight out of ten yield curve inversions since 1921 have preceded recessionary bear markets.

More dangerous than an inverted yield curve is a steepening yield curve. At the beginning of March, the inversion of the 2/10-year U.S. bond yield once exceeded -100 basis points, but then the banking crisis broke out, and the inversion of the 2/10-year U.S. bond yield narrowed simultaneously, and the yield curve steepened sharply transformation, may lift the inversion in the near future,

What is more frightening than inversion is that the yield curve unwinds quickly. And when the yield curve steepens and uninverts, it's usually a signal that a recession is only months away, BofA noted.

As can be seen from the chart below, when the recession really hits, the U.S. bond yield curve tends to quickly get out of inversion, basically in line with today's trend.

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2.”Second signal, tighter credit (already there)

Analysts noted:

"The Fed's Senior Lending Officer Opinion Survey has been tracking banks' willingness to lend since the 1960s. It's flashing warning signs. Lending standards get so tight that it usually triggers a recession, or happens during a recession. Lending standards typically Tightening a year or so before the bear market low. The first credit crunch of 2020 in December 2022 and has been tightening since then."

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As the US financial system gradually emerges from the aftermath of the banking crisis, regulators are starting to strengthen supervision, and credit conditions may be further tightened.

3.The Fed is forced to cut interest rates (yet to appear)

The last sign of a recession that BofA spotted was the Fed cutting interest rates.

The analyst wrote:

"Several Fed rate cuts to start easing are outright bearish signals. Recessionary bear markets typically have a 25% downside after the Fed's first rate cut,"

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Investors are now pricing in one more rate hike at the FOMC meeting in May, followed by a pause in June and a cut in July, futures market data showed. Markets are currently pricing in around 100 basis points of rate cuts by the end of the year.

4. Strategies in a Recession

Bank of America pointed out that although the recession may lead to historical lows in the stock market, the trough in the market means a once-in-a-decade good buying point. Investors can choose to gradually put capital into play around a recession, as data improves and the end of the bear market is confirmed.

Bank of America analyst Michael Hartnett once put forward the "perfect low point" theory in a previous research report, that is, the best buying point for the stock market.

A perfect low point needs to meet three conditions:

• The ISM index fell below 40 (currently above 46);

• Bofa Bull & Bear Indicator (Bofa Bull & Bear Indicator) dropped to 0 (currently 2.3);

• The Fed started cutting interest rates.

In March 2008, December 2018 and March 2020, there were "perfect lows" in US stocks.

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In terms of specific allocation strategies, Bank of America gave three suggestions:

• With the steepening of the yield curve, configure defensive positions, such as consumer goods companies, stay away from overvalued technology stocks, and consider buying gold moderately;

• Take profit as credit conditions tighten;

• Hold more cash after the Fed starts cutting rates.

What’s your understanding of this posts? Welcome to comment.