The broad US stock index S&P 500 signaled a lower probability of a recession on Friday than it did a few weeks ago.
(Photo: AFP)
Frankfurt After the recovery of the stock market in the past few days, prices are now pointing less strongly than before to a future recession. At least that is what a model calculation by the major US bank JP Morgan, which mainly applies to the US economy, indicates. Economists speak of a recession when gross domestic product shrinks for two quarters in a row.
The calculation is based on a comparison to past recessions. The simplified assumption applies here that the respective price high before the recession represented this at zero percent and the respective subsequent price low represented it at 100 percent.
According to this model, which applies mainly to the US economy, the broad US stock index S&P 500 is now signaling a recession probability of around 50 percent, compared to 90 percent in mid-June. The experts at the US bank are assuming that companies’ profit margins will shrink somewhat during a recession, but will then recover relatively quickly and will not show any pronounced upward or downward trend in the longer term.
In contrast, the credit markets, represented by US and European high-yield bonds, are little changed with a recession probability of 30 to 40 percent.
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In mid-June, the signals from equities and high-yield bonds were still far apart, but they have now converged somewhat. The signal emanating from industrial metals has become much stronger: here the probability of a recession has risen from 65 to 85 percent.
Dreaded inversion in the US
The result is a mixed picture that can change again and again due to short-term price movements. In the case of bonds, the situation is particularly complicated. In addition to creditworthiness, which plays a role above all in the case of higher-risk high-yield bonds, the structure of the yield curve sends a message here.
Definition: What is a recession?
Short-term rates have been higher than long-term rates in the US for days. This is considered a sign of a recession, because a weakening economy is usually accompanied by falling interest rates.
On Friday, for example, the yield on two-year US Treasuries was just over 3.0 percent, while the yield on 10-year bonds was just under 2.7 percent and the yield on 30-year bonds was just under 3.0 percent. This dreaded inversion does not exist in Germany, but here, too, long-term yields have recently fallen significantly.
Assessing price movements is particularly difficult at the moment because the markets are constantly switching between two mechanisms. Good news for the economy should actually boost prices. Often enough, however, it is the other way around: bad news gives hope for a less strict monetary policy and thus for better exchange rates, while good news dampens optimism.
After the normalization of monetary policy, the good-good scheme initially prevailed, but recently recession worries seemed to go together with good share prices again – at least temporarily.
More: Who should the loss of prosperity affect?