June 15th, 2024 | RYAN TYLER

Warning Signs Of A Recession And Bear Market

Things are getting shaky.

In late 2022, the yield curve inverted and has remained inverted ever since. That means yields on long-term bonds are lower than yields on short-term bonds, which generally happens in periods of economic uncertainty. In a normal environment, long-term bonds should have naturally higher yields. Historically, when those yields balance out and return to normal, a recession has followed. In fact, there hasn't been a single time in which a yield curve inversion was not followed up by a recession. Worse yet, that's not the only economic indicator flashing red at the moment.

The price of gold has hit astronomical all-time highs, which started sometime after the regional bank failures in the United States. Gold is considered a safe haven for investors during times of fear and uncertainty, which is why it's alarming to see the price of gold continue to rise, or to remain at all-time highs without abating—all while inflation stabilizes and employment numbers remain within safe margins. Even after rate cuts in Europe and Canada, gold prices have remained solid and mostly unaffected.

When we see prices rise the way they have with gold, it means institutional investors and whales are buying it in bulk. When average Joes and small fish buy up gold, or any asset and commodity, it doesn't move prices with the same momentum and speed. Gold's rapid race to the top indicates that big players and governments are buying gold. Not only are they buying it, they're holding it.

Like all things, gold will come crashing down in a recession as people sell, but it likely won't ever come down to where it was in 2020. It will also recover more quickly. This makes it a more secure long-term investment for most investors. Through most recessions, the price of gold has remained reliable.

Aside from gold prices and yield curve inversions, there are still a few more red flags.

The Magnificent Seven

The scariest aspect of the current S&P 500 and Nasdaq situation is the fact that seven companies are propping up the markets. Nvidia has been shooting to the Moon in an apparent AI boom, which has carried other tech stocks and companies higher with it. Overall, most of the other companies in these indices have spent a troubling amount of time in the red through much of May and June.

This begs the question: what happens when Nvidia finally runs out of steam, or encounters a major correction?

Depending who you ask, NVDA and other AI and chip stocks are overvalued. If these people are right, that means a deep correction is inevitable. In any case, corrections are normal, but in unusual cases—when stocks are considered severely overpriced—it can lead to more massive and shocking corrections. If these top seven stocks are indeed overvalued, their corrections will go deep. That could spell doom for the entire U.S. stock market, which would send ripples through most global markets.

Below is screenshot of a month-to-date heatmap of U.S. stocks, followed by the three-month heatmap. It looks like a lot of red has recently started to build up when compared to earlier in the year:

Now:

Since April:

Things appear to be weakening across the board, while tech stocks continue to carry the load. When they stop carrying the load and begin to falter, trouble will set in. Most of 2024 has been green, but the tides appear to be turning on the verge of summer. If NVDA and other tech stocks drop below some of their key support levels, it could trigger panic and mass sell-offs.

A WEAK DOW JONES

Unlike the Nasdaq and S&P 500, the Dow Jones has been teetering on the brink of a decline. It hasn't been keeping pace with the other indices, which could be a sign of an impending bear market. In correlation with the growing red in the S&P 500, it makes sense that the Dow is lower—but that's not a good thing.

The clear divergence between the two indices from mid-May to now can be seen below:

Again, if a few tech and AI stocks are indeed propping up the S&P 500 and Nasdaq, it makes sense for the Dow Jones to be down. In fact, it helps bolster the idea that the market is entering a state of weakness and that a major correction hinges on the strength of a handful of tech stocks.

INFLATION REMAINS ANNOYING

The CPI is still higher than what is considered normal in a boom/bust fiat economic system. The risks of stagflation remain high, as the U.S. and Canadian economies see lower GDP and productivity. Without rate cuts the economy will continue to struggle, but with premature rate cuts, inflation threatens a comeback. If the central bankers don't navigate these waters properly, we could end up with higher inflation and negative GDP at the same time.

Such a situation would cause a deeper recession and market crash.

EMPLOYMENT NUMBERS ARE CRACKING

Unemployment is slowly inching up in Canada and showing signs of trouble in the United States. From April to May, Canada's unemployment ticked up from 6.1% to 6.2%. That doesn't sound like much, but a 6% unemployment rate is already considered a sign of weakness. Canada should be below 6% for the economy to be considered strong. Many elections have been lost under the weight of an unemployment rate that hovers above 6%.

In the U.S., unemployment numbers remain historically low, but they're showing cracks. For the first time in nearly a year, the country's unemployment rate has breached 4%, increasing from 3.7%. In combination with the weakness within the Dow Jones, these numbers are raising red flags.

REAL ESTATE IS A MESS

In both Canada and the United States, commercial real estate is a mess. More people are working from home and ordering products online than ever before. Both retail spaces and office spaces are losing demand. The problem is, many of these spaces are financed with big loans. With higher interest rates, they're becoming more expensive to hold—especially when they are empty.

Lease prices are rising while retail businesses lose profits. This puts both the retail companies and their landlords in a predicament.

In Canada, homes are overpriced due to artificially inflated demand and a dwindling supply. More than half of Canada's homeowners are now house poor, unable to afford the same luxuries they did in 2019. Higher mortgage rates, high property taxes and higher service fees have put most Canadians in a pickle. Millennials have given up on owning homes, while Boomers buy and sell between themselves.

Over the past forty years, Boomers have made extraordinary gains on their real estate, while Millennials and forthcoming generations face the prospects of never becoming homeowners. Through their acquired equity, Boomers can use HELOCs for down payments on additional properties—while Millennials struggle to pay higher rents to their Boomer landlords.

This imbalance in generational wealth will begin to correct itself as Boomers die off and their assets get released into the economy, but we have a long way to go. Even then, wealthy immigrants and corporations could snatch it all up before anyone else gets a chance.

At the moment, this real estate problem has the potential to make a recession more catastrophic if individuals and corporations default on their loans, mortgages, and leases.

POTENTIAL CATALYSTS

Trump winning the election in November would likely cause a positive economic forecast and hype up investors. When he takes office, he would likely deregulate as much as he can, cut taxes, and further fuel economic momentum—which could stave off, soften, or delay a deep recession. If he loses, we're screwed.

Along the way, there are a few catalysts that could trigger an economic meltdown.

More wars and bank failures would cause panic in markets. If Iran cuts off oil routes, it would cause crude prices—and everything else—to skyrocket. This would make inflation rise at a time when economies around the world are teetering on the brink of stagflation or outright collapse.

At the moment, most economies are barely getting by. The global economy is one bad day away from a full blown recession. Stock markets are one bad news story away from a mass sell-off. Millions of homeowners and business owners are one missed payment away from insolvency.

Between now and November, we're all hoping for the best while the storm clouds on the horizon continue to get darker.