With this in mind, the damage that has occurred in the stock market, thus far, already points to a pretty meaningful decline in economic activity in the coming months/quarters. For example, the draw down in home building stocks suggests that single-family housing starts will decline about 8 per cent to 10 per cent relative to year-ago levels. With housing heading into a recession, it is a good bet that the overall economy won’t be that far behind.
Note that, historically speaking, there has never been a time when the economy has avoided recession with real consumer spending falling one per cent relative to year-ago levels. Bottom line — the stock market is sending us a pretty convincing signal that the U.S. economy is heading into recession, and investors would be wise to heed its message. While the Fed is still clinging to hopes of a “soft landing” , this strikes us as very optimistic and inconsistent with what we have seen in the past.
If the stock market is right, there is little chance that the Fed delivers on the hikes that are currently priced into the Treasury curve. As rate hikes start to get priced out — and eventually the market even prices in rate cuts — Treasury yields should melt, making duration exposure a prudent strategy at the current time.
David Rosenberg is founder of independent research firm Rosenberg Research & Associates Inc. Brendan Livingstone is a senior market strategist there. You can sign up for a free, one-month trial on Rosenberg’s
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