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The Federal Reserve’s preferred yield spread, the 3-month to 10-year yield inverted today. In the last 55 years, there have been 8 previous inversions and 8 recessions. This yield spread is an even better indicator of recession than the 2-year to 10-year spread.

According to Barry Bannister, head strategist at Stifel, the median and average time between inversion and recession is 8 and 9 months. There is a standard deviation of almost 4 months. There are examples of recessions that occurred 4 to 6 months after the inversion as well as several recessions 10 to 12 months after inversion.

The probability now favors a recession beginning likely at the end of winter or end of spring 2023. The data shows that there is a big decline in the stock market at the start of the recession. This aligns with our take on the pattern of the 6 mega-bear markets. Should this rally in the S&P 500 last into year-end but a recession gets declared later, it sets up a nasty start to 2023. If this plays out, look for rate cuts by the end of Q1 2023 or in Q2 2023.

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