Recession Model Update (May 2020)
Friends,
Exactly how useful is a "recession model" in a time like this? I'm willing to bet most of us already believe that an economic contraction is imminent or already here. Now whether NBER will end up declaring this a "recession" is another matter, but most of us probably feel those odds are high as well.
For those interested, here is a short relevant piece titled "Recession Measures and NBER" from the Calculated Risk blog.
With that in mind, our own internal gut-feel "probabilities" probably peg the odds of an imminent recession somewhere between 80-100%. Bloomberg's Recession Model is already at 100%.
So it may be difficult to interpret a model like this one where probabilities historically don't come close to 100%.
But such a model can still be useful: since last summer, model probabilities were rising to historically high levels - even if those levels weren't close to 100%.
Depending on an investor's risk profile, that could be a signal to start gradually scaling out of risk assets.
Since today's model probabilities are already elevated, it may be interesting to watch for an extended decrease in model probabilities to suggest an end to the current contraction.
Current Values (as of May 8, 2020)
Until Next Time
Terrence | terrencez.com
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