The World’s Most Powerful Banker Is Wrong About the Economy
Robert Ross|September 24, 2024
“Are we headed for another recession?”
So says the text from my brother-in-law last week. He linked to an article about JPMorgan Chase CEO Jamie Dimon predicting an economic environment “worse than a recession.”
Jamie Dimon is a smart guy. And likely more successful than I’ll ever be. He also has more information than I’ll ever have as the head of the largest bank in the U.S.
But Dimon has cried wolf so many times on this topic. The most recent one came in October 2022 when he wrongly predicted a recession would hit in the next six to nine months…
Right when stocks put in a generational bottom. The S&P 500 has rallied 57% since.
He cried wolf on recession many other times during the 2010s bull market, including in 2018, 2016, and 2011.
He was proven wrong each time.
And I don’t expect this time to be different.
More False Signals in the Market
There are likely two reasons for Jamie Dimon’s latest “boy who cried wolf” impression.
- The yield curve just inverted.
- The Sahm Rule just triggered.
If you aren’t familiar with it, the “yield curve inversion” is when the interest rates on short-term government bonds become higher than the rates on long-term bonds.
It means that investors are worried about the near-term economic outlook and are seeking the safety of long-term bonds, a dynamic that’s happened before every recession in the last century.
And since we just finished our longest inversion ever at 789 days, many people think it’s a sign we’re about to enter a deep recession.
But while the yield curve is predictive, it isn’t useful for making investment decisions. A yield curve inversion doesn’t tell us when a recession will start, how deep it will go or how long it will last.
And a yield curve inversion is an even less reliable predictor of when to buy stocks. In fact, on average, the S&P 500 returns 11% in the 12 months after a yield curve inversion hits its deepest point.
Yes, the yield curve has predictive power. But it’s not useful for making investment decisions.
The same can be said for the Sahm Rule, which is triggered when the three-month average unemployment rate rises by 0.50% or more compared to its lowest point over the past 12 months. This rule has been an accurate recession indicator historically.
But even Claudia Sahm – the Ph.D. economist who invented the rule – recently said it’s likely not reliable thanks to the unusual COVID-era labor market effects.
Plus, the Sahm rule was designed for a decline in labor demand, not a rise in immigration. The influx of new workers was the main reason we saw a modest rise in the unemployment rate in the last report. Job cuts are still very low.
High Yield Bonds Tell the Story
One of the most reliable recession indicators is the spread on high yield bonds.
That’s because high-yield bonds, also known as “junk bonds,” are issued by companies with lower credit ratings. Investors demand higher interest rates to compensate for the extra risk.
When the economy is in trouble or nearing a recession, the risk of these companies defaulting rises, which pushes the spreads (the difference between high-yield bonds and safer government bonds) higher.
As shown in the chart, the current high-yield spreads are well below their historical averages. Investors don’t foresee a major rise in default risk.
We’re also at the early stages of an inventory build-up. This usually happens during the recovery period in the market cycle…
Lastly, falling inflation, stable GDP growth, and a labor market that keeps muddling along all point to this being the early days of an economic recovery rather than a late cycle, pre-recession environment.
Everything Is Not Perfect (And That’s OK)
Now, I’m not saying everything is perfect in the U.S. economy. Far from it.
But it’s important to remain objective in times like this. Because the world is at the very beginning of a major easing cycle (see last week’s interest rate cut from the Federal Reserve).
If we sidestep a recession and get a rate cutting cycle, it is typically very bullish for stocks.
So, while Jamie Dimon may once again be shouting about how the sky is falling, remember that he is very often wrong about these predictions.
For me, I’m going to tune out the noise and remain nimble. That’s exactly what we’ve been doing in my premium investment research service Breakout Fortunes. My subscribers just got into an innovative fintech play that will benefit from falling interest rates. It also has an intriguing technical picture.
I’ll let you know how it pans out.
Robert Ross
Robert Ross’s unique style of clear and direct stock research helped him build a massive following in the investment research industry, starting his career at investment research company Mauldin Economics and quickly rising through the ranks to become one of the youngest chief analysts in the industry. Today, over a million investors turn to Ross every month for his take on investing, economics, and personal finance. He now shares his unique insights in Total Wealth and Manward Money Report.
