How many months do you think the US has been in a recession since 2009?
Surprisingly, just two months.
In the 15 years since the end of the Great Financial Crisis, the U.S. economy has been in recession for only about 1% of the time. Since July 2009, the United States has managed to avoid a recession 99% of the time.
This rarity helps explain why so many have been predicting a recession for years—it feels overdue. And the problem is, these prognosticators are about to get very loud. The market is in a heightened state of emotion right now, evidenced by the VIX spike in early August due to the Yen carry trade unwinding. In addition, the next 6 months will bring us an election, an uninverting yield curve, potentially higher unemployment, and likely continued global turmoil. You will see CNBC discuss how 8 of the last 8 yield curve inversions have resulted in recessions within two years (we’re in month 20 right now). You will see them claim if their presidential candidate loses, we will surely see a recession. They’ll talk about things like the Sahm rule. Investor sentiment. Unemployment. And on and on...
But remember two things:
- Correlation does not equal causation
- Just because it happened before, doesn’t mean it will happen again
For example, let’s look at the yield curve inversion. This means short-term rates pay more than long-term rates, which is a sign of an unhealthy economy.
But let’s take a step back and dissect how correlation does not equal causation. Let’s look at a wild example of shark attacks vs ice cream sales:
Clearly, there is a correlation here. But just because you grab an Oreo Blizzard at the Dairy Queen, does not mean you’ll fall prey to a Tiger Shark at your local beach. The underlying correlation here is that warmer weather brings more people to the beach, and more people craving ice cream.
So, while an inverted yield curve has often been a precursor to recessions, it's far from a guarantee. The economic landscape has evolved, and so have the tools at the disposal of policymakers. The Federal Reserve, for instance, has learned to be more proactive in its responses to economic signals, which may help mitigate the impact that a yield curve inversion traditionally signals.
Moreover, there are unique factors at play in the current environment that differentiate it from past instances. Global monetary policies, technological advancements, and shifts in consumer behavior are all variables that can influence outcomes in ways that historical patterns might not fully capture. So, while the market may react with increased volatility and the media may amplify recession fears, it's important to stay grounded in the understanding that history, while informative, is not necessarily predictive. The economy's resilience over the past decade and a half, despite numerous challenges, serves as a reminder that there is no inevitable path forward—only a complex interplay of factors that will shape what comes next.
Emotions are heightened right now due to this incredible run we’ve had over the last 15 years causing some investors to believe it may be too good to be true. We hear all too often from clients that it feels like we’re due for a recession. Historically, there have been 11 recessions since 1950, averaging one roughly every seven years. But it’s important to note that recessions don’t happen just because an economic expansion has been around for "too long”. Expansions end when something disrupts them—like an unexpected event, a policy mistake, or excessive speculation.
One thing is clear: predicting recessions is notoriously difficult. The recent economic cycle is a perfect example.
In 2022 and 2023, most economists were certain a recession was on the horizon.
Business leaders shared this view. Jamie Dimon warned of an economic "hurricane" in 2022.
Jeff Bezos predicted in late 2022 that if we weren’t already in a recession, one was imminent.
Elon Musk forecasted a global recession that would last well into 2024.
Now, we’re beyond the point when Musk expected the recession to end—and it never even began.
The lesson? Predicting the economy is tough.
Even the stock market, often seen as a barometer of economic health, gets it wrong. There’s an old saying: the stock market has predicted nine of the last five recessions. Since 2009, the S&P 500 has seen significant drawdowns—25%, 34%, 20%, 19%, and 16%. But only one of these was tied to an actual recession.
And it’s not just economists and markets—regular people aren’t great at predicting recessions either.
So, how should you approach predicting a recession?
You could study technical indicators like the inverted yield curve, the Sahm Rule, or leading economic indicators. But these often fail, too.
Or, you could do what many economists do to hedge their bets: claim there’s a 40% chance of a recession. It’s the perfect middle ground—neither too low nor too high. If a recession happens, you called it. If it doesn’t, you can say you called it. You did say there was a 60% chance of no recession.
It’s a win-win strategy, and I’m only half-joking.
In reality, assigning probabilities can be a practical way to manage the uncertainty of the future. While no one knows exactly what will happen, this approach helps in making more informed decisions.
Ultimately, whether you’re making predictions to gain fame or investing based on your forecasts, it’s essential to recognize that most TV pundits don’t have skin in the game. They’re offering opinions without risking their own money.
It’s easy to see why people are eager to predict recessions—after all, recessions are painful. Jobs are lost, businesses fail, and economies suffer. But the U.S. economy is vast and complex, making precise forecasting nearly impossible.
Even if you could predict a recession's timing, profiting from it would still be challenging. Who knows when the market will start pricing in the recovery? As we saw during the COVID crash, economic conditions were still worsening while the stock market was roaring back. Timing the stock market is an entirely different game from timing the economy.
Instead of trying to predict when recessions will happen, it’s far more practical to prepare for their eventual occurrence by diversifying and knowing your risk tolerance.
Disclosures
This material has been prepared for informational purposes only and should not be construed as a solicitation to effect, or attempt to effect, either transactions in securities or the rendering of personalized investment advice. This material is not intended to provide, and should not be relied on for tax, legal, investment, accounting, or other financial advice. You should consult your own tax, legal, financial, and accounting advisors before engaging in any transaction. Asset allocation and diversification do not guarantee a profit or protect against a loss. All references to potential future developments or outcomes are strictly the views and opinions of Richard W. Paul & Associates and in no way promise, guarantee, or seek to predict with any certainty what may or may not occur in various economies and investment markets. Past performance is not necessarily indicative of future performance.