For nearly a year, the bond market has been sending signals that a recession is coming. Stocks have ignored this for much of the past six months. In early July 2022, the yield on the 2-year Treasury note exceeded the yield on the benchmark 10-year Treasury note, a phenomenon known as an inversion, which preceded the six recessions the U.S. has experienced since 1980. Inversions and recessions typically last six to twelve months, plunging the economy into a seemingly inevitable recession. However, stock market investors either don’t seem to notice or don’t care, driving the S&P 500 up about 13% year-to-date and nearly 11% from a year earlier, as gross domestic product has remained positive for the past three quarters. This apparent rupture may lie in the fact that the world of finance and economics has been in an extraordinary period since the outbreak of the Covid-19 pandemic in March 2020. “The market is definitely not going to behave like this ‘waiting for Godot’ recession. It’s just around the corner,” said Art Hogan, chief market strategist at B. Riley Wealth Management. This is a very strange thing. “I’d say the crux of the matter is what’s causing the conundrum, which is the combination of pandemic policy, pandemic reopening and overly aggressive monetary policy. Put these factors together and you can send a lot of signals. In fact, the “this time is different” argument may well apply to a situation the economy has never encountered before: a unique global pandemic met with the most aggressive fiscal and monetary responses in history, all leading to The highest level of inflation ever recorded. For more than 40 years, a strong policy pivot is needed as the Fed attempts to achieve a soft landing, which may include a shallow recession. Therefore, comparing short-term bond yields with 10-year bond yields may Not a useful metric. Recession probability 71%? “Nobody can tell us what the post-pandemic playbook should look like,” Hogan said. “The good signal we’ve historically counted on is a strange confluence of events (now). As far as the Fed is concerned, it is more focused on the relationship between three-month Treasuries and 10-year Treasuries. The curve inverts in late October 2022 and reached its largest gap on record a few weeks ago. New York The Fed uses a model that uses this relationship to calculate the probability of a recession over the next 12 months. As of the end of May, it was about 71%. The inversion level has barely changed since then, so the probability of a recession is probably about the same. However, other Indicators have not been so clear about a recession. Most notably, the labor market has been exceptionally strong, with the unemployment rate still high at 3.7%, despite the Federal Reserve raising its benchmark interest rate by 5 percentage points since March 2022. The economy’s services The industry sector remains strong, and even housing numbers have improved recently. However, the Fed remains in inflation-resistant mode, raising short-term interest rates and potentially distorting the yield curve. In fact, the central bank delayed a June rate hike, but said 2023 Two more rate hikes to come. “The U.S. Treasury yield curve tells an important but incomplete story about the impending risk of a recession in the U.S. economy,” said Nicholas Colas, co-founder of DataTrek. Research, wrote in his market note on Sunday night. “Monetary policy is now being deliberately tightened as a strong labor market continues to fuel inflationary pressures.” The 3m/10yr and 2yr/10yr spreads are in very unusual ranges and this is how the Fed is addressing the issue. Colas noted that the Fed “has no other viable option right now” as it tries to lower inflation, even if it means facing the risk of a recession. Offsets some of the risk,” he added. There is also the term “rolling recession” for a recession that is different from other recessions. Multiple sectors of the U.S. economy — to name just three — autos, housing and manufacturing — Both experienced a possible contraction, and other sectors may follow suit without turning the headline GDP numbers into negative territory. Wharton professor Jeremy Siegel sees a further slowdown ahead. Those looking for a recession A key narrative for the Fed is the lagged effect Fed policy will have. In fact, Siegel said the economy could slow so much that the Fed will miss the two potential rate hikes officials had planned after their policy meeting in early June. If that happens, the market will have to take notice. “It’s going to be hard to see an upside catalyst in the second half of the year,” Siegel said on CNBC’s “Squawk Box” on Monday. “I think the good thing about a mild recession is that not only will we not be raising rates, but … we will probably be cutting rates by the end of the year.” “I’m not talking about disaster,” he added. “But when people ask ‘what’s the good? ‘ I just don’t see that many factors. “