Recession Or Not?

August 5, 2022 – Last week we got the Q2 GDP numbers and the Bureau of Economic Analysis (BEA) confirmed that GDP has now declined for two consecutive quarters. What do I make of that? Are we in a recession now? Since several people asked me to comment on this issue, here are my thoughts…

In the United States, we use two different competing definitions of a recession:

  1. We’re in a recession if an independent panel of famous economics professors associated with the National Bureau of Economic Research (NBER) decides so.
  2. We’re in a recession if we experience two consecutive quarters of GDP declines.

Both definitions have their pros and cons. In academic circles, you’ll find more support for the first one. In Wall Street circles, most people follow the second one. And in political circles, people follow the definition that best suits their current needs, i.e., Democrats currently point out that because the NBER hasn’t called a recession, we can’t possibly be in a recession right now (false, because economic turning points are always backdated), while Republicans insist that the second definition is the only one we’ve ever used (also false).

The advantage of the 2-quarter negative growth definition is that you avoid the long delays when confirming the business cycle turning points. The first GDP estimates come out about four weeks after the end of the quarter (though they’d be subject to further revision). The simple two-quarter GDP definition is thus more useful for practitioners, i.e., folks on Wall Street. Academics, on the other hand, can be more “academic”; they can afford to wait a year or two to guarantee certainty about the business cycle turning points. As someone who’s worked in both academic and Wall Street circles, I can tell you that clocks run a bit slower in academia. I once submitted a paper to a journal in 2001 and it was published in 2006. Wall Street wants to move a bit quicker than that!

Waiting for the NBER to make their decision can be frustrating. Take, for example, the 2001 recession. The NBER didn’t announce the March 2001 recession start until November 2001. The timing is ironic because that month turned out to be the end of the recession. That’s like a pregnancy test where the result is available after the baby is born. And the November 2001 end of the recession wasn’t confirmed by the NBER until 2003. So, anyone who argued in the Summer of 2001 that there is no recession because the NBER hadn’t announced one yet, was wrong!

The 2001 recession was special in another way: That recession didn’t even satisfy the second criterion. In 2001, the first and third quarter GDP growth was negative, but the second quarter GDP number was ever so slightly positive. The same pattern, negative-positive-negative growth quarters, also occurred during the 1960-1961 recession. Also notice that the pandemic recession spanned only two months: March and April 2020. Just by dumb luck, the 2020 recession spanned two quarters and indeed produced the “magical” two consecutive quarters. Had the 2020 recession occurred just one month earlier or one month later, then the two recession months would have fallen into the same quarter. And we would have observed only one quarter of negative GDP growth, again falling short of the two consecutive quarters of decline criterion.

So, the two-consecutive quarters of negative GDP growth is certainly not a necessary condition for the NBER to eventually declare a recession. But is the second criterion a sufficient condition for the NBER to declare a recession? At least in recent history, there hasn’t been any 2-quarter contraction outside of an NBER recession.

In the rest of the post, let me try to look for indicators to support the two sides of the “recession or not” argument:

The case against a recession

First, for a recession, the labor market is still too strong. Normally, we see an increase in the unemployment rate and a decline in payroll employment. This morning (August 5, 2022) we just got another Nonfarm Payroll Employment release from the Bureau of Labor Statistics (BLS), and payrolls grew by another strong rate of 528,000 in the month of July. The unemployment rate dropped another notch to 3.5%.

In fact, before the slower-moving monthly numbers display signs of weakness, we normally observe a marked uptick in the weekly unemployment claims, which regular readers of my blog will remember is my preferred labor market business cycle indicator. Sure, there is a bit of an increase, but neither the level nor the slope of the unemployment claims is screaming “recession” right now.

Initial Jobless Claims. Note: I chopped off the y-axis to see the non-pandemic data in more detail! Source: U.S. Employment and Training Administration, via St. Louis Fed FRED

Second, some of the other indicators the NBER will closely watch are not looking too shabby either. Industrial Production expanded during the first five months of the year. True, in June we saw a slight decrease but this is a volatile series and we don’t normally call a recession every time this indicator sees a small month-over-month decline. But watch this series going forward. Economic weakness normally shows up in IP before you see a payroll drop. So another 1 or 2 months of IP decline would certainly set off my recession alarm bells!

Industrial Production. Source: Board of Governors of the Federal Reserve System, via St. Louis Fed FRED

Real Personal Income also still looks solid. The usual disclaimer applies that there are many households still hurting from the pandemic and/or inflation, but the macro picture – aggregating over all households – still looks solid, which bodes well for consumption going forward.

My preferred manufacturing indicator is the Purchasing Managers Index (PMI), both the headline index and the “New Orders” component. Both indicators have indeed declined recently but they still look too strong for an outright recession. The headline (overall) PMI index stands at 53 in July, still solidly in the expanding region (above 50). The slightly more leading New Orders subcomponent indeed slipped below 50, indicating a slight contraction in business activity. But we’d occasionally see levels slightly below 50 even during economic expansions. I’d get worried if we fall below 45.

Also notice that financial markets have been holding up. True, the S&P 500 index dropped by more than 20% between January 3 and June 16 this year but has recovered about half of the loss since. We’re now only about 13% below the all-time-high (8/4/2022 S&P 500 close). And just to be sure, this doesn’t mean that we’re in a new Bull Market again. See my 2020 post about this topic!

Also, a reliable financial stress indicator is the interest rate spread that corporations must pay over and above safe government bonds. The OAS (option-adjusted spread) of High-Yield bonds spiked a little bit in June this year but has moderated again. What’s more, even that spike was nowhere near what we’ve observed in other recessions (2001, 2008-9, 2020). That little blip on the screen didn’t even come close to some of the other false alarms (1998 LTCM, 2011 downgrade, 2016 Fed scare) that never even came close to a full-blown recession.

High-Yield OAS. Source: Ice Data Indices, LLC via St. Louis Fed FRED

But all that said, not everything looks rosy either. Next, let me make the pessimistic case…

The case for a recession

Most prominently, the yield curve recently inverted again. As you remember from previous blog posts, this indicator is on the top of my list as one of the most reliable early warning signs of a slowdown. What makes me worried about the current yield curve today is that the 10-2 yield curve slope didn’t just dip below zero by a few basis points but by a full 37 basis points (August 3, 2022). The bond market tells us that after the Fed slashes the inflation dragon, it must subsequently lower interest rates again (and aggressively!) to deal with the ensuing recession. The 10-year yield has dropped from 3.49% (June 14) to now well under 3%. That’s not a good sign. I always say that the smartest people on Wall Street are the Fixed Income Folks. They seem to know something that the rest of us didn’t figure out yet!

Spread between the 10Y and 2Y Treasury Yields. Source: St. Louis Fed FRED

Another concern: Can the Fed really accomplish its goal of reducing inflation with modest interest rate hikes? Maybe not. Thus, complacency about rate hikes is another risk factor. If you remember, the Federal Reserve rate hike forecast published in June stood at 3.4% and 3.8% by the end of 2022 and 2023, respectively (and then 2.5% long-term, which I interpret at December 2026 in the chart below). Since then, interest rate forecasts have come down from even these modest levels. Fed Funds Futures markets now stand at 3.0% for December 2023 ( as of 8/3/2022).

Interest Rate Projections. Source: YahooFinance. 8/3/2022

What’s the reason for everyone predicting that the Fed will take it easy with the rate hikes? There is mounting evidence that the July CPI numbers, to be published in mid-August will see a marked decline. But is that one-time decline enough for inflation pressures to miraculously reverse? Even if the Y/Y CPI reading drops from 9.1% to 8% or even 7%, that’s still unsustainably high. For as long as inflation is elevated, it’s much more likely that the FOMC will keep raising rates. At 50-75bps every meeting we’ll easily get well above the levels currently predicted by the interest rate forecasts.

As I wrote in my post a while ago, people at the Fed will probably breathe a sigh of relief if we entered a mild recession that will ease the price pressures sooner rather than later. That’s preferable to the Fed going into Paul-Volcker mode necessitating a positive real(!) Fed Funds rate, which would currently imply a nominal policy rate of, say, 12.1% if targeting a 3% real rate. That would do a trick on the economy!

Another issue that’s not fully appreciated is that the labor market, despite recent gains, is still massively underwater from the pandemic shock. In other words, people pointing to the healthy labor market say that the trajectory is fine. But the level is still severely depressed. More than two years into the economic recovery, nonfarm payrolls just passed their February 2020 peak. If we were to apply a 125,000 monthly trend job growth rate to keep up with population growth, after 2.5 years we’re still 3.75 million jobs underwater, relative to the trend growth path extrapolated forward from the February 2020 peak. So, maybe this could be the first recession where employment doesn’t drop or doesn’t drop much because employment never really recovered from the previous recession.

Nonfarm Payroll Employment. Source: BLS, via St. Louis Fed FRED


So, what’s my verdict? I’m more aligned with the NBER economists: It’s too early to tell. The economy doesn’t display the typical recession pattern yet, but not all is well in the macroeconomy. In other words, we appear to be in that limbo state where the economy certainly shows signs of weakening, but it’s too early to call an outright recession. Think of today’s economy as in the same condition as the stock market in the Spring of 2022. It was already down, but not enough to call it a bear market. It could have recovered again and it would have been a false alarm. But when the market finally hit the -20% mark, the Bear Market was called and its starting point was then backdated(!) to January 4, the day after the all-time high on January 3. So, people who point out that the NBER hasn’t declared an economic turning point yet shouldn’t pounce too aggressively on the crowd following that “naïve” 2-quarter negative GDP criterion. That criterion might turn out to be correct again, we just don’t know it yet!

Thanks for stopping by! I’m looking forward to your comments and suggestions below.

Title image by Markus Spiske from Pixabay

69 thoughts on “Recession Or Not?

  1. “Think of today’s economy as in the same condition as the stock market in the Spring of 2022.”

    Typo? Did you mean Spring of 2020 here?

    1. No!
      In the Spring of 2020 we were obviously in a recession and the Stock Market dropped very quickly into Bear Market territory.
      I mean to say that in the Spring of 2022, when the market dropped by, say, 10%. At that time we were in the Bear Market already, we just didn’t know it yet. 😉

  2. Great article as always. Quick question. Do you think we are even going to even see a material decline in employment or is it a recession requirement not factoring in here?

    The labor participation rate never recovered from pre-covid levels and there may be more natural attrition happening within companies than direct layoffs, dampening the number.

    I’m wondering if unemployment numbers may not be a reliable factor for this possible recession and what that means for fed policy goals.

    1. Well, we normally need to see a big decline in employment to drag down consumption (close to 70% of GDP). During a recession, it’s not that every household cuts consumption equally by a few %. It’s the folks who lose their jobs that cut consumption by 50+%.
      So, without a big drop in employment we will likely not see a deep recession.
      But we can see a mild recession even with the labor market holding up.

  3. Hi Karsten,
    Hope you and the family are all well.
    Just wanted to get your thoughts on analysis that I have read in the FT’s Unhedged column, which suggests that the spread between the 10 year and 3 month rates is a better indication of an approaching recession and that is not negative yet. Apparently, Jay Powell believes this too and referenced the research here
    All the best,

    1. Yeah, people go back and forth between the 10y2y and the 10y3m.
      In my personal experience, when including all the other indicators in a nowcasting exercise, I found that the 10y2y adds more than the 10y3m. But it certainly be true that the 10y3m is better on a standalone basis.
      But thanks for the link. Nice paper!

  4. I’m reminded of the old joke. Economist: “The difference between a recession and a depression? It’s very easy. A recession is when you lose your job. A depression is when I lose my job.”

    Unemployment is at a 50 year low, and there doesn’t seem to be (many) people who are disaffected i.e. no point in looking because nothing is available. I don’t know what to think about job openings or housing inventory. The internet and covid have changed so much.

    I think my real question is: “What does calling a recession accurately mean?” Can we measure the results i.e. NBER ever get it wrong? What does “wrong” mean? Is it useful to know we’re in a recession or not?

    Inflation, stock market, unemployment, VIX, mortality, poverty… so many more important economic issues?

    And an easier question, “Why is unemployment claims always charted as an absolute number? Wouldn’t a percentage be more meaningful?” Everyone does this, and people aren’t afraid of percentages for inflation statistics.. so… ?

    1. All good points.
      I’d prefer to use the unemployment claims as % of the labor force. By that measure, we’re even more bullish today due to the larger denominator.
      But granted, the initial claims are now trending up a bit. Both the level and the direction contain leading indicator information.

      Strictly peaking, the NBER never gets it wrong, because they wait for so long after the event.

  5. We are in an unusual type of recession (using the two quarter definition). While the economic inputs (labor, capital and commodities) keep a high rate of utilization the economy looses efficiency so the outputs (goods) become increasingly scarce.

    1. Agree! Very good point. I think we’ve destroyed quite a bit of productivity with bad policies. Factors are still utilized but the final outcome is inferior.
      Your line of thinking is exactly what my old econ professor Ed Prescott would say. It’s all about total factor productivity shocks. (he won the 2004 Nobel Prize for that and other contributions to the field of macroeconomics).

      1. Presumably like many others here, I’m a fan of economics, but have only “observational” knowledge vs. any significant schooling on the subject. So please forgive my ignorance.

        My observation on the “are we or aren’t we?” topic is that the various shocks that have occurred (like the injection of $2T into our economy, incentives for the many people who provide our goods and services to not work, and massive increase in wealth for upper income “spenders” due to the stock market in the 2020/2021 years) have happened too quickly and artificially to use standard baselines for determining whether we’re in a recession. The wealthy had tons of money to spend, but no one to make/deliver the products they wanted…this is a classic almost too simplistic supply/demand chart from econ 101…inflation is the unsurprising result.

        With the non-inflation adjusted GDP rising significantly over the first 2 quarters, compared to our “normal” inflation of 2%, one might think we were in a massive expansion…but we do have inflation. My question is do the inflation numbers we are now seeing compare to the structural inflation from the 80’s for instance, or are they really an artificial construct of our fiscal policies and rapid recovery from the pandemic? If so, with some tightening, will we snap back to normal?

        I don’t personally believe, based upon my daily observations in my manufacturing company and what I see around me, that we are in a recession. But I firmly believe we can create one.

        1. Thanks for sharing your experience. Glad to know that from your vantage point there doesn’t seem to be a recession and demand is still solid.

          I share your concern about the stimulus packages. For people who really needed the money this didn’t make much of a difference. But lots of well-to-do folks got free money and went on a spending spree. Together with encouraging people to not work, this had to create inflation.

          The inflation now vs. 1970s/80s have some similarities. Both periods were preceded by long monetary expansions, where the Fed tried to stimulate but appears to be pushing on a string. Eventually something goes wrong (oil shock in the 70s, pandemic shock in 2020) and the the guano hits the fan. What’s not clear yet is how persistent today’s inflation will be.
          Non-energy inflation is already down. But core CPI and core PCE are still way too high.

  6. Question on your last point that we need to create 125,000 jobs per month to keep up with the growing population. Per this data from FRED, the working age population (age 25-54) has basically not grown since 2007:

    Are we actually short on the number of jobs if the size of the available labor force hasn’t changed?

  7. Thanks for this latest post. No data to point at but folks I know have been indicating that employers are not pushing to fill open positions and unwilling to pay for experience (white collar jobs).

    Also I enjoyed seeing you on two sides of fi , and listening to the long view podcast with you and David Blanchett.

  8. The contrast between the low unemployment rate and the low nonfarm payroll employment number is related to the people who dropped out of the labor force, and are thus not counted as having a job or being unemployed. I think the post-pandemic decrease in the labor force participation rate comes down to 3 factors:

    1) The existing downtrend in labor force participation due to aging demographics in the US, and an increase in the number of people living off paper investments.

    2) Casualties from the COVID-19 pandemic: Most of the 1,059,000 people who died were elderly, but for every death there were probably 3-5 cases of long-COVID disability. I know some people who were forced to leave the labor force due to symptoms that never resolved. Then there are the caretakers for all these disabled people. This might include 0.5% to 1% of the pre-pandemic workforce. For more details, see

    3) COVID-19 early retirees and SAHPs: A lot of people in high-risk groups opted to take an early retirement or mini-retirement rather than exposing themselves to the risk of COVID in their customer-facing or crowded job sites. If you were a 62 year old retail or office worker, for example, you had to option of reducing your risk of death or disability by simply taking social security earlier, and a lot of such people took the deal. Others took the opportunity to stay home with their kids rather than exposing both themselves and their kids to unsafe environments. Some, but not all, of this category of people will be looking for work again as the risk decreases. Probably at least half are out of the labor market for good.

    Of course, all these people except the dead ones remain consumers. A higher dependency ratio is inflationary, because a larger set of people are demanding a smaller supply of labor. What we’re seeing now is a rush of consumption as people try to lock in prices before they go up, and this self-perpetuating process could go on for a long time because the rationale still holds each month/year. If you’ll need a new car, house, appliance, or vacation within the next 3 years, you might as well buy it now because both the price and the interest rate are expected to go up.

    Those expecting a recession by Christmas that will save us from both inflation and the prospect of a 5%+ federal funds rate might need to look at the history of these sorts of things. Rate hiking campaigns in response to soaring inflation almost always last longer than a year, usually exceed 500 basis points, and don’t lead to a recession for more than a year. Similarly, yield curve inversions have had a mean time to recession of about 18 months IIRC. With strong consumer demand propping up the economy, I expect 0.75% hikes for the rest of the year and into 2023. That’s an off-the-charts prediction per the CME FedWatch tool.

    1. Sorry, this comment was filtered out (too many links) and I just found it in the “pending” folder waiting for approval.

      All good points. Agree!

      A few thoughts: Most of the demographic transition from the baby boomers had been finished before the pandemic. So I don’t believe that this holds back the labor force participation.

      Wherever the low participation rate comes from, we’re hiding a low labor supply when looking at only the unemployment rate. A better measure is the payroll employment jobs number, which is still pretty weak. No surprise if you pay folks to stay home. A lot of human capital was lost by people not working.

  9. One other wrinkle is that while reported Real Gross Domestic Product (GDP) had declined for the past two quarters, reported Real Gross Domestic Income (GDI) has increased over the same two quarters. The BEA explains the difference between GDP and GDI:

    GDI is an alternative way of measuring the nation’s economy, by counting the incomes earned and costs incurred in production. In theory, GDI should equal gross domestic product, but the different source data yield different results. The difference between the two measures is known as the “statistical discrepancy.” BEA considers GDP more reliable because it’s based on timelier, more expansive data.

    That suggests that the economy most likely did shrink over the last two quarters despite the GDI numbers saying otherwise. But the discrepancy between the GDP and GDI is another issue that the NBER must consider before decide whether to declare a recession.

    1. A recession occurred during 2 quarters when the unemployment rate fell from 4% (January) to 3.6% (June)? That’s a tough sell. The explanation for inventories affecting GDP have been out for a while now.

      1. Yeah, a hard sell. But a mild recession could be possible even with strong employment levels. But you’re right, I can’t imagine yet that we have a deep recession. That’s only possible when lots of folks lose their jobs and then cut down their consumption.

  10. Thanks for all your blogs, big fan of your work.

    I’ve read that you suggest against 100% stocks around the time you retire due to sequence of return risks. Would it be reasonable to retire with 100% stocks if I withdraw 2.5% variable percentage (or more preferably, 1.5% fixed+inflation plus 1% variable)? This would be for a 60+ year retirement horizon

  11. Would you still recommend a glidepath in that scenario, or does the % component of the withdrawal help enough, with respect to sequence of returns concerns?

  12. Karsten, I’m curious, if you don’t mind sharing, what stock/bond portfolio allocation are you using now “in retirement” and intending to use on your glidepath?

      1. Hi Karsten,

        I’m curious why you haven’t made a small gold allocation at this point. I have seen in a couple other places that you analyzed gold, and it seems to improve SWR.

        If we do end up in a recession this year, do you think gold will lead other asset classes, or is that what you are counting on bonds and a large cash allocation for?

        I like your allocation to real estate. You don’t talk about it as much as stocks/bonds/options. Is that entirely in personally-owned properties or do you hold some REITs also?

  13. Hi,
    I’m new to your newsletter, and stem from the service industry and mfg world. Recently retired, i could have used some of your experience in my planning stages. Most of what you write and is on your website is far above my understanding yet i love economics and am dedicated to learn evermore. What you publish and the manner in which you do so requires a lot of work and decication, as i understand you are no longer employed and enjoying your time (our most precious commodity) to its fullest. I hope you plan to continue to comment for a while or at least i know enough to get myself in trouble when i pontificate about economic topics. Stay well. Cheers! Marc

  14. What do you think about Wade Pfau’s suggestions to use annuities instead of bonds for guarding against sequence of return risk? He also suggests that SWR is 2.2% because bond returns and interest rates are very different now than in the past.

    1. That seems insanely low. And that’s for a 30y horizon?
      If a 60/40 portfolio would have sustained a 3.8% WR even in worst-case scenarios (1929, 1960s), then why would I want to do this annuity approach where I get less for sure? With the current low-yield environment, the “safety First” approach is really unappetizing.

      The problem with most of the financial advisor crowd is that annuities are pushed because they pay very rich fees to the planner. And the retiree loses.

  15. My bet is on a formal recession. Inverted yield hasn’t been wrong yet. Two qtr / GDP. Fed hasn’t unwound QT yet. Future corp earnings coming down but not enough yet. Max capitulation hasn’t hit yet. Increased unemployment to come. No one is worried enough over increasing Nat Gas prices. Inflation from 9.1 to 7% is easy, but from 7 to Fed 2% target will seem like forever and be painful for consumers. Then again, my crystal ball remains cloudy. 🙂

    1. The average time from yield curve inversion to recession is 18 months though!

      Looking at all the weird numbers regarding inflation expectations and Fed Funds Rate futures, I can only conclude the market thinks the Fed will stop hiking rates while CPI is 6-7% on the rationale that rate hikes are working and momentum is on the right track. Then, the market concludes, the fed will be correct about all that, and for the first time ever inflation will fall while the FFR is less than the CPI! Maybe CPI is expected to fall all on its own due to an extremely mild recession (if earnings are going down as in, you know, a typical recession, then today’s valuations don’t make sense). It’s a strangely specific and unprecedented forecast, and yet multiple markets are pointing to it all at the same time.

      I agree the FOMC might stop hiking rates if they see evidence of recession, even if CPI is high. But what if 3.5% unemployment, full restaurants, strong consumer demand, etc. persist through the end of this year? Then the narrative flips to – oh, we were wrong and the FOMC is going to have to hike rates till they’re higher than CPI! Rates are going to 7-8%! Should have read about the Taylor Rule!

      1. It was a strange move on Friday: 10y yields went up by only 0.01 percentage point, but the S&P dropped by 3+% out of fear of rate hikes. Seems like the bond market believes the rates are dramatic in the short-term, but then we’d have a recession and the Fed will lower the rates again.
        We shall see. I’m mentally prepared for 3 more 75bps hikes this year Buckle up!

        1. I think your right about more larger hikes than what the street had thought previously.
          Cash is looking better and better…

  16. I’ve read a few sources that indicate the jobless claims numbers are sorta masked because 1. We had a higher than usual population loss in the working age range to Covid over the past two years, 2. Self-employed aren’t typically included in jobless claims and that demographic may have taken a disproportionate hit than “employee class”. (+Gig economy ebb and flow).

    Are any of these considerations significant enough to impact your analysis here?

    (I’m not actually sure they do but wanted your opinion).


    1. 1: not enough to quantitative impact
      2: true: it’s hard to measure self-employed. But that’s true in every recession. Unless this impact is worse now than in past recessions, I still believe the unemployment claims are a decent early indicator.

  17. ERN,

    Awesome site.

    Maybe I am being stupid but I can’t find on your site detailed analysis of CAPE10 based withdrawal rules which you suggest are the best ways for determining withdrawals.

    In particular, did you ever do historical testing on rules like (1 + 0.5*CAEY)% to see failure rates (defined, I guess, as dropping below some percentage of the original portfolio in annual withdrawal?), min/max and average pot left at the end, etc?

  18. It seems like announcing whether or not we’re in a recession is simply just political football. If a republican is in the white house, as in 2001, 2018 the media skews the issue a bit to make it seem like things are worse than they are to make the current party look bad.
    Conversely, since a democrat is in office now, they make sure to skirt the issue by altering the definition of a recession in an effort to protect the current white house inhabitant. It’s just political theater, its sad but its the media we live with.

    1. I agree completely with your political observations, but it is great to have a reasonable discourse in a forum like this…I’m personally not a big fan of the current administration, but my opinion about the lack of recession (currently) for the reasons I stated prior stands nonetheless. It seems most people (not all) believe what they want to believe and are not really interested in learning or even hearing others’ views. I find the opportunity to hear others’ reasoned opinions to be very valuable, so thanks to all for sharing.

  19. Mr. ERN. The idea behind the asset allocation principle indicates that in times like this I should sell bonds to buy stocks to bring the allocation to target.
    However I find myself having to sell stocks to buy bonds at the present to reach my target allocation.
    Does it make sense or are we just seeing the end of the allocation principle theory?

    1. The reason people feel the need to rebalance and sell bonds to buy stocks is that stocks dropped more than bonds so far this year.
      Not sure why your rebalance trade works in the other direction. I can only speak for the average index investor. If you are a stock picker and you got lucky and hold stocks that might have fallen only 10% so far, then yes, the rebalancing goes in the opposite direction…

      1. No sir, I’m an index investor too and I have to disagree. The bond fund I use to index, the TLT is down 29% YTD while the stock fund I use, the ITOT is down 25%. I’m close to retirement so I shifted my asset allocation last year to 50% bonds and this year it has been performing worse than stocks which really threw a curved ball to my retirement plans next year. Not sure what to do now other than working for a year more.

        1. Yep, TLT is down more than the stock market. I do most of my analysis with 10-year intermediate bonds (i.e., iShares IEF) and that fund is certainly down less than the stock market.

          In any case, the advantage is that now got a 30-year bond portfolio with pretty decent yields. Might hold on to it. Not sure I would want to sell stocks to pile more into bonds, though…

  20. I don’t know if others feel this way, but I eagerly await ERN’s next post and next commentary on the economy.

  21. Hi Karsten,

    What are the odds of another Lost Decade? Weird similarities abound with the 1970s.

    There are also plenty saying that if there is a liquidity event in the US, like the BOE, the Fed will pivot. What do you think? Wishful thinking or likely in today’s political climate?

    1. if it’s only a decade that’s ok….I’m afraid it will be more what Japan is going thru for 30yrs…one day the mighty US empire would colapse…we’re seeing it now

      1. Hi Karsten,

        First off, love your adjusted CAPE post. Much prefer your blog, one of the more serious ones, to Financial Samurai or Ben Carlson, which don’t have as much research as you do.

        The lost decade of market returns that concerns me and my retirement portfolio is from 1968-1982. Stocks went nowhere for over a decade due to inflation not tamed, an aggressive but ineffective Fed and stagflation. The only asset that did well was commodities.

        With strange similarities between today and the 1970s, what are the odds that another lost decade of market returns occurs again over the next multiple years?

        1. Great point! The similarities are striking. From the mid-60s on, the Fed tried to stimulate the economy. Lot’s of loose monetary policy, then an energy shock set of the fire.
          I cross my fingers that we’ll avoid that scenario. But I’m prepared for it to happen as well.

          1. Just saw the long term return projections in your latest blog post (really good read!). Equities at 3.5% real return for 10 years, to increase after. Interesting. Does this partially include the Lost Decade assumptions and comprise mainly dividends?

            Also incredibly curious how you prepare portfolio for Lost Decade scenario!

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