As the Dow Jones Industrial Average DJIA, +0.82% , S&P 500 SPX, +0.82% , and Nasdaq Composite COMP, +0.64% lost anywhere from 6.6% to 7.9% in the worst May for stocks since 2010, bond prices have soared.
Campbell Harvey, a professor at the Fuqua School of Business at Duke University, has tracked yield curve inversions for more than 30 years. He showed the reliability of the indicator in his doctoral dissertation at the University of Chicago in 1986. Harvey’s chart shows the yield curve projections of a recession’s probability hit 80%-100% in the 1970s and 1980s, then settled into the 40%-50% range for the last three recessions. As of June 3rd, the yield curve implied about a 40% probability of a recession — definitely within the danger zone.
That concern is underscored by the latest Duke University/CFO Global Business Outlook, which found that 67% of the chief financial officers surveyed believe the U.S. will be in a recession by the fourth quarter of 2020, while 84% believe a recession will be underway by the first quarter of 2021. That’s pretty much in line with a negative yield curve’s 12- to 18-month lead time in predicting recession, Harvey said.
Greater caution, he added, “actually increases the chance that, if there is a downturn, it's a lot softer. I much prefer the mild [recession]. I want to engineer the soft landing. One way to do that is for consumers and corporations to be prudent when they're faced with these red flags.”
Source: News Formal (newsformal.com)
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