98% Chance of a Recession — Recession Probability Model Hit 98%

Image by Ned Davis Research Inc.

In September 2022, this recession probability model hit 98%.

Does it mean that we should panic and sell everything because we're gonna go to hell? 

Or is it a time that the market may actually bottom?

When this model meets that exact same signal in the past, where was the stock market?

🧠 The stock market was at the bottom — in fact at the early stages of the new bull market!

Why is it that when this model tells us that it's a recession, the stock market has actually bottomed and is near the bottom, right before it starts going up?

🧠 Remember that all these models are lagging indicators. 

By the time they tell you it's a recession, it's already in a recession in fact it's during the middle of the recession or towards the tail end of it.

Other times when it went above a 70% probability, by the time this signal came in, the economy was already in the middle of a recession towards the end of it. The gray shaded area represents the recessionary periods.

Now some of you may be wondering "Hey this shaded area represents recession, so how come we are not yet in a recession based on this chart? Why is there not a gray line over here?"

Well, that's because the NBER, the National Bureau of Economic Research has not officially declared a recession. Once they declare it they'll say “okay it started on this date,” and then they would have this shaded graph. 

Here's the problem; historically by the time the NBER declares a recession, it is usually 7.8 months after the recession began!

In other words, it's only after the recession started, 7.8 months later when it's going to end they say "Hey, we were actually in a recession!"

So it's always a lagging indicator. 

I'm not saying that right now is the bottom — I can't predict for certainty we could still go lower. 

What I'm saying is to be careful when you read articles like that. A lot of people read these articles and they get really emotional, they get terrified, and they sell because they think that we're gonna go into a global recession.

🤌 Historically if you had sold every time the market went above 70% recession, you would have sold near the bottom of the market.

So you can see that historically, when there's a global recession signal, more often than not the market is very near or at the bottom! Not all the time, but more often than not. 

So I would much rather be a buyer of stocks right now than a seller of stocks.