Recession No More? Here Are the Signs

For months, Wall Street has been engulfed in a debate regarding the possibility of a recession in the United States. Central to this debate has been whether Federal Reserve Chair Jerome Powell and the Federal Open Market Committee (FOMC) could steer the economy toward a soft landing, or if the nation was barreling toward a hard landing. Recent indicators, however, suggest that a recession may not be on the horizon after all.

Shifting Economic Forecasts

Goldman Sachs has recently changed its stance on the likelihood of a U.S. recession. As of October 8, the investment bank reduced its estimate from a 20% chance to just 15% over the next 12 months. This shift indicates a growing optimism regarding the resilience of the U.S. economy.

Rising Treasury Yields Reflect Economic Confidence

One of the most significant indicators of economic sentiment has been the yields on U.S. Treasuries. The yield on the 10-year Treasury note jumped from 3.62% on September 16 to a notable three-month high of 4.27% by October 28. This 65 basis point increase signals that investors anticipate fewer interest rate cuts may be necessary in the future. Rate cuts are typically enacted to stave off economic slowdowns, so rising yields imply a diminishing risk of recession.

Traders are currently watching the 10-year yield closely as it approaches a resistance level established in July. The Relative Strength Index (RSI), which measures the speed and change of price movements, is now in overbought territory—a development that can be interpreted positively. An overbought instrument can potentially continue to rise even further, suggesting sustained confidence in Treasury performance.

Consumer Staples: Another Indicator of Economic Stability

The recent performance of consumer staples stocks also paints a positive picture for the U.S. economy. Traditionally, consumer staples—products such as food, toothpaste, and detergent—are seen as necessities. This sector typically outperforms during downturns, making it a defensive choice for investors. Notably, the SPDR Consumer Staple ETF (XLP) reached an all-time high on September 16, coinciding with the low point for 10-year Treasury yields for the year. However, the dynamics have shifted since then, with consumer staples stocks trending lower.

Analysts suggest that institutional investors likely bolstered their holdings in consumer staples in anticipation of a recession. Now, as the economic outlook brightens, these institutions are starting to liquidate these stocks, evidenced by XLP closing below its 50-day moving average for six consecutive sessions.

Understanding the Connection Between Treasury Yields and Consumer Stocks

The movements in Treasury yields and consumer staples stocks highlight a connection often observed in financial markets. Both asset classes serve as defensive positions; rising Treasury yields generally indicate that institutions are selling off such defensive holdings. The simultaneous decline in consumer staples stocks suggests that institutional investors are reassessing the economic landscape.

The reasoning behind this trend is simple: credible researchers working for these institutions are likely analyzing data indicating an improving economic scenario. As one financial mentor states, “Always assume that someone has information that you don’t have. You don’t have to know what they know. You only need to know if they are buying or selling.”

Conclusion

The recent signals from Goldman Sachs and Treasury yields indicate a potential shift away from recession fears, showcasing a resilience within the U.S. economy. The declining probability of a recession, coupled with rising Treasury yields and shifts in consumer staples stocks, suggests that institutional investors are becoming increasingly optimistic about the future. While uncertainty may still loom, the collective indicators propose that the U.S. economy might be on the right track, veering away from the anticipated downturn.