How close are we to the next recession? Stocks lose 30-50% in recessions and lead the recovery before the data turns. The yield curve, jobless claims trend, and the Sahm Rule are the earliest reliable warnings.
Yield curve +0.83% (+0) · Sahm -0.03pp (+0) · Claims trend -2.1% (+0) · LEI +1.72% (+0)
A composite of the 10Y-3M curve (40 wt), Sahm Rule (30), jobless claims trend (15), and the Leading Index (15). Above 50 historically precedes recessions by 6-18 months. Below 33 has never coincided with a recession start.
What is the Fed doing to equity multiples? Restrictive policy (real Fed Funds above ~0.5%) compresses P/E ratios. Easing expands them. Watch the 2-year Treasury — it forecasts where Fed Funds will be 12 months out.
Real Fed Funds = Effective Fed Funds rate minus core-PCE inflation (YoY). The "neutral" rate is widely estimated at ~0.5%. Above that range, policy is restrictive — historically a 6-18 month headwind to equity multiples. Below -0.5%, policy is accommodative and supportive of risk assets.
Is the market in risk-on or risk-off mode? Credit spreads, VIX, and financial stress all rise together when stocks are about to take a hit. The dollar strengthens in flight-to-safety; oil reflects both inflation and demand.
HY Spread 2nd pctile · VIX 29th pctile · Stress Idx 7th pctile
Average percentile rank of HY credit spreads, VIX, and the St. Louis Fed Financial Stress Index. Above 66 = stress regime (equity drawdowns more likely). Below 33 = complacent (equity drawdowns deeper when they come).
Will corporate earnings hold up? Industrial production and payrolls drive revenue growth; real consumer spending drives the 70% of GDP that consumer stocks depend on; sentiment is a leading indicator of both.
Industrial production, payrolls, real consumer spending, and sentiment together explain ~70% of next-year earnings revisions. When 2+ flip bearish, S&P forward EPS estimates typically follow within 1-2 quarters.