The next recession, timing and trading it.

Intermarket Analysis Throught Macro and Technical Methods

#17 Timing and trading the next recession.

Estimated dates for the next recession.

In this article, you will find:

The path ahead for the American economy, the dates for the next recession, and the macroeconomic analysis methodology we use to estimate it.
A full technical trading set-up for a slowing economy. Buying the Health Care sector.
A full technical trading set-up for a recessionary economy. Selling the Energy sector.

A brief recap of what we’ve covered in the last article (here), to get everyone on the same page.

In the previous article, we analyzed building permits issued up until August 2024, which will translate into new units by August 2025. After reviewing sales up to August 2024, we concluded that the market is overstocked by 8,541,000 units. What makes it possible to foresee the next recession.

*In the second column, we have the unit sales between August 2023 and August 2024. In the fourth column, we have the building permits issued for the same period one year earlier—these are the homes that were built for the sales dates in column 2. In the fifth column, we show the monthly surplus, which adds to the stock, and finally, in the sixth column, we quantify the total stock by summing all the unsold surplus.

After adjusting for historical shrinkage, we estimate 5,978,000 units in stock, with 700,000 sold per month since August 2024.

A slow market by nature adjusts through prices. Builders with poor inventory management are exposed to price adjustments, requiring strong investment strategies. Companies relying on sales also risk stalled growth and liquidity issues, affecting clients and debt holders.

Now, let’s fast-forward a year. We already have the permits issued up to this date.

*In the blue column, we ask what the sales will be between September 2024 and August 2025 to compare them with the permits that have already been issued for those months.

In August 2024, just last month, 1,430,000 building permits were issued for homes to be sold in August 2025. To put the problem into perspective, in July 2024, only 739,000 units were sold.

Building Permits and Recessions

Building permits are an excellent leading indicator for upcoming recessions (highlighted in red). Peaks often precede the recession, and troughs typically signal its end.

Housing Affordability.

Could demand absorb this oversupply in the coming months?

*Values below 100 imply that a family with average income cannot afford a home with an average mortgage. We discussed here the various macroeconomic factors contributing to this situation and why there are no near-term prospects for demand absorbing this surplus.

This situation is created by several macro variables that we have discussed here.

Jobs in the Construction Sector: Leading Indicator for the next recession.

Yesterday, the F.E.D. released data on new jobs generated in the construction sector for July, highlighting several key points:

Constructors are reacting fast: Too late.

The size and speed of the decline are the largest seen since at least 2002.
New jobs in the construction sector serve as an excellent leading indicator for timing and trading the recession (gray areas), especially during bear markets.

Labor Market and Recessions: Initial-Continuing Claims

In July 2022, the yield curve inverted, and the real economy began to shift. While initial unemployment claims are decreasing, continuing claims have been rising since July 2022, indicating the economy isn’t absorbing unemployed workers.

Last week, the BLS revised job creation data from March 2023 to March 2024, showing 818,000 fewer jobs than initially reported, explaining the rise in continuing claims.

Understanding Economic Cycles for the Next recession.

As we discussed here, the most reliable leading indicator for the timing of a recession is generated by the market and reflected in the yield curve. Within that, we use various methodologies.

Key Indicators of an Impending Downturn. Anticipating the next recession.

Methodology 1: Average time for the start of the recession after the first rate cut.

The first rate cuts and past recessions.

*Each time the FED began a rate cut, a recession followed. In the chart, rate cut beginnings and recessions are highlighted in green.

*In the left column, we list the last four recessions and the number of days that passed between the first rate cut, prior to the recessions, and the recession itself. In the gray zone, we calculate an average of the time elapsed, in days, months, or years.

Today, the market assigns a 100% chance of a rate cut as soon as Sep-18, the next F.E.D meeting. In the past, on average, the next recession have begun 8.8 months after the first cut, meaning June-July 2025.

Methodology 2: Yield Curve Inversions

The most popular interpretation of the yield curve.

*In the first column, the dates of recessions; in the second, the dates of the yield curve inversions; in the following columns, the anticipation of the inversion in days, months, or years.

On average, yield curve inversions have predicted the next recession 28 months, or 2.3 years, in advance. This time, the inversion occurred in July 2022, which suggests that the next recession should begin around October-November 2024.

Methodology 3: The 30-Year Spread and the F.E.D Fund Rate.

The lesser-known, but no less effective, methodology is based on the spread between the 30-year rate and the FED funds rate. When this spread reaches its minimum absolute value (whether negative or positive), it signals that a recession is on the way.

How do we know when it is at its minimum?

A good indicator is when the FED makes its first rate cut. This is a necessary but not sufficient condition. The market must support this by keeping the 30-year rates at least stable.

Anticipating the next recession seems quite obvious ex post.

*The blue ellipses show the moment when the spread reaches its absolute minimum, which often coincides with the maximum of the FED funds rate. Generally, this happens, but it is possible that the market, even with an initial rate cut, does not validate better future expectations, and the 30-year rates continue to decline.

The situation today.

The blue line represents the 30-year spread minus the FED funds rate.Is it at its absolute minimum? I believe it is, but the market still needs to validate this, either with a rise in 30-year rates or at least by keeping them stable.

Timing the next recession with this methodology.

*In the first column, the dates of recessions and the lead time when this spread reached its absolute minimum.

First Conclusion

Overlaying the three indicators and their different lead times gives us the most probable dates for a recession, between October 2024 and May 2025.

It’s important to understand that these are historical averages—it could happen earlier or later. The key point is that it will happen, and anticipating this is crucial for successful trading.

Timing the next recession via Macroeconomic Analysis

Initial Claims and Recessions

Initial unemployment claims are a key indicator when timing recessions. Historically, a sustained rise in initial claims has often signaled the onset of a recession.

As layoffs increase, the labor market weakens, which contributes to slower economic growth and reduced consumer spending—both common triggers for a recession.

Monitoring trends in initial claims provides valuable insight into the economy’s health and the potential timing of a downturn.

*Initial claims before and during recessions, highlighted in red.

The main threat to this hypothesis.

All of these recessions occurred when the state played a less active role. For example, in today’s regional bank crisis, the state’s swift action as the lender of last resort mitigated a potential crisis.

As the American deficit continues to grow, the state may intervene again during the next crisis, potentially delaying but amplifying the consequences later.

Intervention comes at a cost—currency value and inflation risks would exacerbate a future crisis. At the very least, this could affect the dollar as a safe haven and the value of American bonds, though it’s too early to fully gauge the impact.

Understanding economic cycles to foresee the next recession.

Sector Trading the next recession.

Anticipating, timing, and trading a recession opens a range of options depending on each agent’s risk appetite. Risk-on, risk-off, or staying on the sidelines are all viable strategies. The availability of ETFs expands these possibilities, enabling us to trade various hypotheses.

Sector analysis.

Analyzing the relative value of different economic sectors today, especially in bear markets, will guide investment strategies. Identifying asymmetries between current values and those anticipated during a recession helps select the right vehicle to trade this hypothesis. In a recession, sectors perform differently depending on the elasticity of the goods they produce.

As always, I hope you enjoyed this as much as I did writing it. I’ve been passionate about my work for nearly 30 years now—a privilege life has granted me.

That’s all for now. Trades and setups derived from this analysis can be found in Article #18 and are exclusive to subscribers.

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