Stock Market Crash: Expert Warns Recession Signals Flashing Red

But now, some economic data is starting to sour, and a recession threatens to catch investors sleeping, says Albert Edwards, the Societe Generale strategist who called the dot-com bubble.

“‘Proper’ equity bear markets (falls of 30%+) only really occur in recessions and so that is what equity investors fear most – especially against expectations of continued economic recovery,” Edwards wrote in a June 5 client note.

Edwards said there are a couple of warning signs that a recession could be on our doorstep. The first is that GDP expectations recently cratered. The Atlanta Fed’s GDPNow model dropped Q2 GDP expectations to 1.8% on June 3, thanks to weakening manufacturing data. That was down from 3.4% a week earlier. But the model’s estimates have since climbed back to 3.1%, partly thanks to Friday’s jobs data.

Even though projections have bounced back over the last few days, Edwards showed that GDP tracks closely with the Institute for Supply Management’s New Orders data, which has recently slid. Current levels suggest GDP growth could slow to under 1% in the months ahead.

“As GDP growth disintegrates, equity investors should be worried,” Edwards said. “That recession might yet arrive after all.”

If a recession does unfold, Edwards also argued against the notion that the Fed can prevent a stock-market crash through rate cuts.

“Even if Armageddon looms, I guarantee the investment air will be filled with the sound of the bulls singing their soft-landing siren songs,” he said. “And beyond that, I can also guarantee you will hear that any recession will be shallow as the Fed have ample firepower to slash rates…just as they always did in past recessions although that never prevented a collapse in the equity market.”

The macro picture

A recession in the months ahead would certainly catch investors by surprise. According to an April Wall Street Journal survey of economists, the US has a 29% chance of entering a recession over the next year. Compare that to the 61% chance that economists assigned in January 2023.

But is a recession really taking shape? Some traditional indicators say so, including The Conference Board’s Leading Economic Index and the Treasury yield curve, which have a perfect track record of signaling downturns over the last several decades.

However economic data is mixed at the moment. On the one hand, the US economy added a robust 275,000 jobs in May, smashing expectations of 182,000. Inflation also remains above 3%, indicating that consumer demand is hanging in.

On the other side of the coin, the unemployment rate rose to 4.1% in May, up from 3.4% lows last year. The year-over-year percentage change of unemployed persons, which takes labor participation rates out of the equation, is also at levels consistent with a downturn.

Job openings data also disappointed earlier this month, hitting the lowest levels since early 2021.

In short, there are plenty of signs that the economy is slowing down. But whether or not it will continue to slow, to what degree, and how the Federal Reserve adjusts policy accordingly remains to be seen.

As Edwards says, though, what really matters for investors is how things turn out relative to expectations. And right now, the latter is sky-high.