Next recession: Reliable signal shows 2020 downturn, no stock returns – Business Insider

Since the US yield curve inverted and startled the market, there’s been a debate about whether the recession warning sign was for real.

Stifel’s head of institutional equity Barry Bannister says that it is, and the implications are more dire than most people believe. In a note to clients, he writes that stocks are likely to sink in December, with a recession setting in in May. After that he sees a “dangerous” market where the S&P 500 could deliver 0% returns for five years.

A yield curve inversion occurs when short-term bond yields top their longer-dated counterparts, and is a sign investors are deeply worried about the economy. Since it’s happened before each of last seven recessions, it’s considered one of the most trustworthy recession signals. And it’s flashed recently as the trade war prompted an investor flight to safer assets.

But Bannister notes that it’s also sounded some false alarms over the years. So he uses a different yield curve measurement that he says is more precise: a 50-day moving average of the spread between the 3-month and 10-year bonds. He says that version of the yield curve has correctly forecast every recession in the last 50 years without a single incorrect prediction.

“A 50-day moving average of the 10 year-3 month has given no false recession signals in the past 50 years,” he says.

Bannister, who has long had a dim view of the market, shows the measure’s history at the top of this chart. The second chart below shows that these yield curve inversions have been followed pretty quickly by declines in S&P 500 profits.