12 charts show a global recession has already begun — and how investors can protect their portfolios


A team of investment strategists at Bank of America have identified 12 signs that a global recession has already begun, even if stock-market investors have yet to notice.

The team, led by BofA Global Research’s Chief Investment Strategist Michael Hartnett, shared these “dirty dozen” recession indicators — named for the 1960s cinema classic — in the latest weekly “flow show” report, which was shared with MarketWatch on Monday.

Drawing from a range of sources, including U.S. economic data, bank lending, financial markets and more, these 12 charts show how demand for heavy industrial goods and critical commodities like crude oil have already started to weaken, while bond markets are behaving as if a recession has already started.

ISM points to slowdown

A key barometer of activity at U.S. factories dropped for the fifth straight month in March, reflecting the weakest level of activity since shortly after the beginning of the COVID-19 pandemic.

The Institute for Supply Management’s manufacturing index dropped to 46.3% last month from 47.7% the month prior, marking the lowest level since May 2020.


The manufacturing gauge appears to be teetering on the brink of levels consistent with recession.

“In the past 70 years, whenever manufacturing ISM dropped below 45, recession occurred on 11 out of 12 occasions (exception was 1967),” the team said in the note.

New orders portends weakness in corporate earnings

The new orders component of the ISM manufacturing gauge came in at 44.3 last month. This suggests that corporate earnings likely shrank again during the quarter ended in March, just as Wall Street analysts expect.

Levels below 45 on the new orders index have coincided with a so-called earnings recession — that is, two consecutive quarters of negative earnings growth — at least four times during the last few decades, according to the BofA team. It happened in 1991, 2001, 2008 and 2020.


Earnings per share for the S&P 500 are expected to have contracted by 6.8% during the quarter ended in March, according a FactSet consensus estimate. Profits already contracted during the quarter ended in December.

Global corporate profits set to fall

Looking beyond the U.S., a BofA’s model for forecasting global profit growth is showing a sharp contraction during the first half of 2023.

The model, which incorporates disparate data points from Asian exports to Chinese financial conditions to the Treasury yield cruve, shows global EPS could shrink16% year over year by August.


Steeper Treasury yield curve is a warning sign

An inverted Treasury yield curve has historically been a reliable indicator that a recession will likely arrive during the coming year.

But once the recession has begun, or is about to begin, the curve steepens as long-term rates move lower at a faster pace than short-term rates, a sign that investors are seeking to lock up their money for the long term in a relatively safe asset.

This appears to be happening already, as the yield premium that the 2-year Treasury note
is offering over the 10-year note
has shrunk to less than 50 basis points, down from more than 100 basis points one month ago.


Supply cuts aren’t boosting oil prices

Last week, the OPEC+ group of oil exporters agreed to cut production for the second time since October. Together, members of the group agreed to cut an additional 1.16 million barrels per day of production beginning in May through the end of 2023, while Russia agreed to extend a 500,000 barrel-a-day cut through year-end.

The cut appears to have boosted oil prices, but not by much. The June Brent crude

the global benchmark, was trading at $83.48 a barrel on Monday. By comparison, it finished March at $79.77. The production cut was announced on a Sunday night ahead of the first U.S. trading session of April.

That oil prices aren’t surging is “another recessionary hint,” the analysts said.


Labor market set to weaken

The U.S. labor market has continued to defy concerns that it’s postpandemic run of extraordinary growth is coming to an end.

Despite reports of more cuts by firms in the technology, financial services and media space, data released Friday by the Labor Department on Friday showed the U.S. economy added 238,000 new jobs in March, which was roughly in line with the consensus estimate from economists polled by The Wall Street Journal. While the pace of growth has slowed from its postpandemic highs, it remains robust relative to its prepandemic performance.


However, the BofA team believes that signs of slowing manufacturing activity could portend that more pronounced weakness lies ahead.

Housing markets weakening around the world

Signs of weakness in housing markets from the U.S. to Australia suggest that higher interest rates are beginning to take their toll on the global economy, the BofA team said.


Credit crunch has already begun

Banks are curtailing lending to smaller U.S. companies over the past few quarters, a trend that the BofA team expects to intensify following the collapse of Silicon Valley Bank and widespread worries about the health of other regional lenders.


European bank lending is contracting

Lending by European banks to nonfinancial firms has contracted for three months straight, according to data from the European Central Bank cited by the BofA team.

Such a pronounced slowdown is rare outside of a crisis.


Job openings are falling

Job openings in the U.S. fell to a 21-month low of 9.9 million in February, marking a third consecutive month of declines. The report rattled U.S. stocks when it was released last week.

The BofA team believes it could be a sign of more trouble ahead.


Sell the last rate hike

So, how should investors position for the coming recession? A BofA analysis of historical returns showed that U.S. stocks, represented by the Dow Jones Industrial Average
are typically lower six months after the Fed’s final rate hike when recession arrive during periods of high inflation.

“’Sell the last hike’ was the correct strategy for stocks in the inflationary ’70s/’80s,” the team said in the note.


Stock-market returns during periods of low inflation are typically more robust, with U.S. markets typically higher six months after the last hike (of course, stock-market returns are generally better when high inflation isn’t eating away at the value of future returns).

While traders are hoping that a recession will mean the end of the Fed’s rate hikes, which helped inspire last year’s sharp stock-market selloff, history shows that U.S. stocks seldom make it through a recession unscathed.

During eight of the last 10 recessions, the S&P 500
experienced drawdowns of more than 20% from one year beforehand. This means there’s scope for stocks to resume their declines if the global economy continues to deteriorate, as the BofA team expects.


Right now, different asset classes are sending conflicting signals about the odds of a recession. Gold prices, which are near their record highs, appear to suggest that a recession is imminent. Weakness in U.S. small-capitalization stocks and regional bank stocks are sending similar signals.

On the other hand, highflying megacap technology names like Microsoft Corp.
and Apple Inc.
appear to be blissfully unaware of these risks. Investors might want to consider selling, Hartnett and his team said. A handful of analysts cited in another recent MarketWatch report agree.

See: Are tech stocks becoming a haven again? ‘It’s a mistake,’ say market analysts.


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