Bear markets and recession - A serious signal

 

The eminent economist Paul Samuelson famously quipped that the stock market had predicted nine of the past five recessions. The numbers above suggest something different but realize that you must be careful about how the term "bear market" is defined. If you look at other indices, you may get different results. 

Nevertheless, the combination of a stock market bear and an inverted yield curve is a good combination of recession signals. The bear market could be a repricing of market risk, but it also can be a signal about future earnings that are driven by the real economy. We are repricing equity values given higher inflation and higher yields. 

That factor combination does not mean we will have a recession; however, tighter money conditions with a more difficult environment for pricing costs and output is a recipe for a recession. We certainly are in a stagflation environment.