Recession Will Sink S&P 500 by 40%, Economist Says

Interest rates work to slow the economy by making auto loans, mortgages, credit card debt, and business loans more expensive to take on. This slows demand, therefore theoretically slowing inflation, but often at the cost of profits and jobs. 

Fed officials have repeatedly stated their intentions to get inflation back down to their target, and markets are betting they won’t cut rates until well into next year. 

“The Fed wants to make sure they’ve killed inflation,” Shilling said.

Shilling, who called the 2008 recession, pointed out that recessions sometimes don’t start until the Fed has already begun to cut rates. Rate hikes operate on a lag, taking time to fully impact the economy. According to the economist David Rosenberg, 80% of the Fed’s hiking cycles end in a recession.

Trusted recession indicators are also signaling that a downturn is coming, Shilling said. One of them is the Treasury yield curve. Every time the curve has inverted since the 1960s, a recession has followed. 

An inversion happens when short-duration yields rise above longer-duration yields as a result of both a rising fed funds rate and investors piling into safe-haven assets like the 10-year note as they grow concerned about the economy’s health.

Here’s the spread between 3-month and 10-year yields. An inversion occurs when the spread dips below zero. 

Another indicator Shilling pointed to is the The Conference Board’s Leading Economic Index, which bundles 10 indexes on things like manufacturing activity, lending activity, bond-market performance, stock-market performance, consumer outlooks, and…