There is no asset class that provides investors with a more consistent return over an extended period of time than the stock market. Despite the inclusion of unavoidable periods of decline, the mean yearly return on investments has consistently surpassed the annualized returns of virtually every asset class imaginable, including bonds, gold, oil, housing, and even housing.
Conversely, the narrative changes drastically when considering lesser time periods. When examining Wall Street over the span of several months to two years, inconsistency emerges as the sole enduring feature. Bear and bull markets have alternated in consecutive years for the illustrious Dow Jones Industrial Average (DJI), the benchmark S&P 500 (SNPINDEX: GSPC), and the growth-driven Nasdaq Composite (NASDAQINDEX: IXIC) since the turn of the decade.
While perfect accuracy in predicting the direction of movements in the Dow Jones, S&P 500, and Nasdaq Composite is unattainable, both professional and retail investors persist in their endeavors. Frequently, investors rely on predictive tools and choose economic datapoints that exhibit a robust historical correlation with upward or downward movements in the three primary stock indices.
This predictive instrument has maintained its impeccable performance for over fifty years.
The recession probability indicator of the Federal Reserve Bank of New York has effectively predicted the trajectory of the U.S. economy and stock market for an extended period of time, perhaps more so than any other predictive instrument.
The spread (difference in yield) between three-month Treasury bills and 10-year Treasury bonds is utilized by the New York Fed’s recession probability tool to ascertain the likelihood that the United States will experience a recession within the next twelve months.
The Treasury yield curve exhibits a rightward inclination when investors are experiencing an optimistic outlook and the U.S. economy is operating at full capacity. Put simply, the yields on longer-dated maturities are greater than those on bills that are scheduled to mature within months. A higher yield is anticipated for an interest-bearing security the longer an investor’s capital is invested in it.
