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I believe we are entering a critical phase in the economic cycle where warning signs are becoming increasingly hard to ignore. Despite efforts by central banks to stimulate growth through rate cuts, insider sentiment and key economic indicators suggest that the market may be going through a significant downturn. As we analyze trends in credit card delinquencies, job openings, and the yield curve, the risk of an upcoming recession appears more pronounced than ever.

Usually, rate cuts are intended to stimulate economic growth. However, insider sentiment is pointing in the opposite direction, with company executives losing confidence in their own businesses. Rising credit card delinquencies and declining personal savings reflect financial stress among consumers. Moreover, job openings are dropping sharply, signalling a potential slowdown in the labor market, while the yield curve is adjusting in ways that historically predict recessions.

Fed Pivot

After each major interest rate pivot, a recession followed. This pattern is seen in several key periods: the early 1990s, early 2000s, and following the 2008 financial crisis. Each of these periods had sharp reductions in interest rates after a peak, coinciding with economic downturns. The trend suggests that such rate pivots, intended to stimulate the economy, often occur in response to deeper underlying economic issues, eventually leading to recessions.

Insider Sentiment

This graph shows a sharp recent downturn in insider buying activity, reaching its lowest level in at least a decade. Company executives and directors are doubtful to invest in their own stocks. This cautious attitude could indicate concerns about near-term economic conditions or doubts about the positive impact of the anticipated rate cut.

Rising Consumer Pain

This graph illustrates a sharp increase in credit card delinquencies, reaching series highs across multiple timeframes. The chart tracks the share of credit card balances that are past due, categorized into 30+, 60+, and 90+ days delinquent. All three categories show a steep upward trajectory from 2021 to 2024, with the 30+ days past due rate climbing most dramatically. This alarming trend suggests significant financial stress among consumers, potentially indicating broader economic difficulties. The rising delinquency rates may reflect challenges in managing debt amid high-interest rates, inflation, or other economic pressures. Such widespread consumer struggles could have implications for overall economic health.

Labor Market Weakness

In August, the jobs report showed that nonfarm payrolls increased by 142,000, which was lower than the expected 161,000. The unemployment rate dropped to 4.2%, but the broader “real” unemployment rate rose to 7.9%, the highest since October 2021. There was a surge in part-time jobs by 527,000, while full-time positions decreased by 438,000.

This slower job growth, coupled with downward revisions for June and July, puts pressure on the Federal Reserve to consider cutting rates at its September meeting. With a loss of 24,000 manufacturing jobs and inflation easing, the Fed may take action, potentially benefiting NASDAQ:TLT as investors move towards safer assets.

Yield Curve Normalization

Disinversion of the U.S. yield curve with 10-year Treasury yields surpassing 2-year yields for only the second time since 2022. This shift is driven by weaker-than-anticipated job openings data, fueling market expectations for aggressive interest rate cuts by the Federal Reserve. Historically, such yield curve movements often precede significant economic changes.

Fed Rate Cuts Vs. Bitcoin

Bitcoin’s dramatic price movements during past Federal Reserve rate cut cycles. It shows two significant periods: one with a 41.56% drop and another with a steeper 54.44% decline during the COVID-19 “black swan” event. As we approach the September 18th rate cut, this historical pattern implies potential initial volatility for Bitcoin.

US Consumer Financial Health

A troubling gap between increasing consumer credit card debt and decreasing personal savings in the United States. Credit card debt has reached alarming levels, now 28% higher than its 2008 peak, while personal savings have dropped 8% below previous levels. This widening inequality signals increasing financial vulnerability among consumers, with greater reliance on credit and reduced capacity to handle economic shocks.

ISM Manufacturing Purchasing Managers’ Index (PMI)

A persistent downward trend in the ISM Manufacturing PMI, with the index remaining below the crucial 50-point expansion/contraction threshold. The latest August 2024 value of 47.2 underperforms both forecasts and previous figures, indicating a deepening contraction in manufacturing activity.

This indicator has been below the normal level of 50 for a year and a half now, and it’s approaching the key recession indicator level of 45. A sustained period below 50 suggests contraction in the manufacturing sector, often a forerunner of a broader economic slowdown.

Recession Risk

This table provides a perspective on the likelihood of a recession following a yield curve inversion. According to these calculations, the probability of a recession occurring within the next 30 months is quite high.

Fast Vs. Slow Fed Rate Cuts

The performance of the S&P 500 during different rate-cutting cycles, categorizing them into fast, slow, and non-cycles. A fast cycle involves at least five rate cuts in a year, while a slow cycle has fewer than five, and a non-cycle consists of just one cut. The data provided by Charles Schwab shows that fast rate-cutting cycles result in significantly larger drawdowns for the S&P 500.

Within the first six months after an initial rate cut, the average maximum drawdown during fast cycles was about twice as large as during slow cycles. Over 12 months, the difference widened further, with drawdowns in fast cycles averaging 20.7%, compared to just 7.4% in slow cycles.

TLT’s Performance During Rate Cuts

2007-2008 Financial Crisis: As the Fed aggressively cut rates in response to the crisis, TLT saw impressive gains. From September 2007 to December 2008, while the S&P 500 fell by about 40%, TLT rose more than 30%.

2019 Rate Cuts: When the Fed cut rates three times in 2019, TLT gained about 14% over the year and about 18% in the following 2020.

Conclusion

The signs of an approaching economic downturn are becoming harder to ignore. Insider sentiment shows a lack of confidence, rising credit card delinquencies, a sharp decline in job openings, and troubling yield curve movements. The market is showing warning signals of a potential recession. Historically, Fed rate cuts have not only failed to prevent recessions but often followed them, increasing the risks.

I believe that during times of economic uncertainty, TLT may be a strong choice. Its historical performance during rate-cutting cycles, particularly during the 2007-2008 Financial Crisis and the 2019 rate cuts, shows that TLT tends to gain value as the market may have downturns. As we anticipate rate cuts, TLT could again be a reliable hedge against equity market volatility and economic instability.