Janet Yellen Fears A Recession?

S&P 500 In A 3 Day Losing Streak

S&P 500 fell again on Thursday as the market finally makes sense again. After being very overbought, a sense of normalcy has returned. S&P 500 was down 0.16% on Thursday which means it is still within 1% of its record high. It’s still nice to see the 14 day RSI falling, the CNN fear and greed index falling, and the gap between the market and its 200 day moving average shrinking. 

CNN fear and greed index fell 4 points to 70 which is greed. Now, I’m not as bearish as I was earlier this week, but I still think further downside remains. It’s common to see stocks overdo it and become oversold in corrections. The stock market is nowhere near oversold. VIX is still below 15 as that streak continued. It inched closer to 15 on Thursday as it increased 0.35 to 13.13.

Bearish Investors & Recession Worries

In the week ending November 20th, only 34.2% of investors were bullish as you can see from the chart below (down 6.5 points). That’s below the historical average of 38%. This rally is hated compared to the one early in 2018. Investors are more optimistic now than last fall. But that’s obvious since the market is at its record high now and it was in the midst of a 20% correction last year. 

There are actually less bulls and bears than average which explains why the percentage of neutral investors hit 36.7% which is 5.2 points above the historical average. Percentage of bears rose 4.2 points to 29%. It’s amazing to see the lack of euphoria since the market exhibited it with its price action. Stocks got way overbought. It’s great to see individual investors not biting because it means this correction won’t be large.

It’s very obvious the economy is in a deep slowdown. It’s potentially worse than 2015-16 which almost became a recession. Luckily, the fracking industry wasn’t large enough to crater the economy. The Fed said the economy was in good shape 3 weeks ago in its Minutes. Latest results say otherwise. It’s not as big of a mistake as saying the economy is fine today, but it was the wrong assessment. The economy is in weak shape. A negative catalyst could easily cause a recession.

At the World Business Forum Yellen stated she fears a recession. If she was Fed chair, she probably wouldn’t admit this. But now she is free to speak her mind without having a major impact on the economy and markets. She stated, “I would bet that there would not be a recession in the coming year. But I would have to say that the odds of a recession are higher than normal and at a level that frankly I am not comfortable with.” She is exactly correct. 

There’s probably about a 30% chance of a recession in the next 6 months. That means you’d still bet against one occurring if you had the chance. Risk of a recession is elevated when the economy is in a slowdown. Markets would be extremely fearful of one if the Fed hadn’t cut rates at all this year.

Review Of Thursday’s Action

Nasdaq was down 0.24% and the Russell 2000 was down 0.48%. Biggest losing sectors were real estate and consumer discretionary which fell 1.39% and 0.53%. Eenergy sector, which has been volatile recently, was the biggest winner as it rose 1.63%. 

Two other winners were healthcare and communication services which increased 0.22% and 0.25%. As you should be aware, the healthcare sector has possibly been reacting to the Democratic primary. If Warren or Sanders do well in the polls, the managed care stocks fall and if Biden or Buttigieg do well, they rally.

We won’t know how the debate went until the polls come out. Sometimes the analysts aren’t correct when they declare a victor. Latest news as of before the debate is great for healthcare stocks as Buttigieg has been rising in the polls. In the latest Iowa poll, Buttigieg was up by 7 points. His average lead in the recent polls is 5.7 points. If the election was held later this year, he’d win Iowa. 

However, it won’t be we still need to watch closely. PredictIt has Warren with a 25% chance of winning and Buttigieg with a 23% chance. It’s a 4 way race as of November 2019.

It’s interesting that the 10 year yield has risen 4 basis points recently. Long bond predicted this decline in stocks with its yield decline and now that stocks are falling, it is increasing. 10 year yield is at 1.78% and the 2 year yield is at 1.61%. The curve has flattened a few more basis points. And, the curve is very flat because nominal growth expectations have diminished. 

With the Fed’s Minutes published, there is still only a 5.2% chance of a cut in December. It’s not happening. There is a 69.9% chance of a cut next year. That’s because the Fed funds futures market isn’t sold on the idea that there will be a growth acceleration next year like the stock market is. Fed won’t cut rates in December or January, but it is open to doing so later in the year if the data gets worse.


The stock market is less overbought that it was earlier this week. Economic data is still weak, but the bulls have expected this. Let’s see if it turns around soon. There is an elevated risk of a recession. Even though I don’t see one occurring soon, it’s a bigger risk than the market is pricing in for sure. 

Yellen stated she fears a recession because she’s not Fed chair anymore. If Powell wasn’t Fed chair, he’d likely say there is a relatively high recession risk too. I’m going to be watching yearly growth in the leading indicators index closely in the next 2 months.

Spread the love

Comments are closed.