A 29-year undefeated indicator warns of a recession, is the most dangerous moment in the stock market approaching?

Since 1997, the ratio of the 3-month US Treasury bond yield to the US junk bond spread has consistently and accurately predicted every US economic recession, with no false alarms. Recently, this indicator dropped below its 100-week moving average, followed by a rebound, indicating a high likelihood of an economic recession in the coming months. The trend of the ratio falling below the 100-week average and then rebounding signifies that the stock market has entered the most dangerous downward phase, with the risk of recession further increasing in the coming months. With the escalating conflict between the US-Israel and Iran possibly turning into a long-term geopolitical war, current pricing trends in the global bond market suggest that the market may be shifting from inflation expectations to pricing in the possibility of a new global economic recession. Typically, as market recession expectations transition into real-world economic recession, global stock markets may gradually weaken and decline relatively slowly, similar to the market performance after the bursting of the internet bubble in the early 2000s, rather than a sharp crash. The whole world is worried about the largest ever energy supply shortage caused by the Middle East geopolitical conflict, and stock portfolios are beginning to feel the pain. The global financial markets have entered the "precursor pricing stage of recession panic," or more accurately, a "stagflationary growth panic," rather than fully pricing in a deep recession. A recent report from Goldman Sachs Delta-One business head Rich Privorotsky indicates that the global stock market is not in a simple stage where bad news leads to a rebound, but rather in a fragile balance of extreme pessimism in sentiment and positioning, with short-term technical repair conditions present, but lacking macro and earnings logic to support confident long positions. Privorotsky assesses the situation, pointing out that although there are paths for a political resolution in Iran, coupled with fear indexes dropping into extreme ranges, crowded CTA shorts, and deleveraging before the holidays, these conditions may set the stage for a short-term asymmetric rebound. However, underlying pressures, such as oil price impacts transitioning market logic from pure risk avoidance to a defensive mode of "growth downward revision + tight policy," continuous valuation compression in AI and chip chain sectors, and the reevaluation of end values of assets like high-valuation software, plus potential credit risks such as private credit, suggest that even as short positions are eased, the stock market is more likely to experience a fragile, repetitive, and highly selective recovery rather than a full-fledged bull market reversal. While we have not yet entered a technical bear market (a drop of at least 20% from historical highs), one of the main stock market indices, the Nasdaq 100 index, has already dropped below a key technical threshold of 10%, entering a correction zone. Moreover, recent news has been increasingly pessimistic, with more Wall Street analysts questioning how deep the market will fall. Revealing an interesting and little-known indicator! This key indicator signals an imminent recession The Middle East war intensifies, and the geopolitical situation is far from under control. Specifically, there is a little-known but highly reliable indicator in the global financial market that has officially issued a recession warning based on its track record of accurately predicting every economic recession in the past 30 years. This indicator's reliability lies not only in its precise trigger mechanism for each recession over the past 29 years but also in the fact that it has never produced a false positive signal. This is quite rare; in fact, long-standing and reliable indicators such as the inverted yield curve, LEI indicator, and Sam rule have not accurately predicted mechanisms for accurate predictions between 2022 and 2023. They all predicted economic downturns in those years, although global stock markets did indeed decline significantly, we did not experience the long-awaited deep recession. Unlike the incorrect predictions of the US Treasury 2/10-year yield curve inversion, this indicator has not given any false positive signals in 2022. Additionally, if we compare it to the S&P 500 index, we find an interesting and obvious consistent fact. As investors typically note, this indicator does not signal an imminent economic recession when it falls but rather after it rebounds. This rebound always touches the 100-period moving average, or at least never exceeds it, signifying an imminent recession. We did experience this rebound after the "Liberation Day" in April 2025. If the Trump administration-led retaliatory tariff rates had not been lowered, we would likely have already faced an economic recession. However, the tariffs were reduced, and risk appetite briefly took the lead until the labor market started showing cracks by the end of 2025. The current global energy crisis could be the final blow to push this ratio further into the economic recession range. The ratio of the 3-month US Treasury bond yield to the junk bond spread has now fallen below the 100-week moving average and rebounded, entering the most dangerous downward phase in history. Based on historical samples, this pattern often corresponds to a significant increase in the risk of recession in the coming months, indicating an impending economic recession. In reality, cracks are beginning to appear in the US private credit sector, with Blue Owl restricting redemption of two funds, and Barclays and Morgan Stanley predicting that default rates in this area could rise to an annualized rate of 8%. The global asset management sector related to private credit has already lost around $132 billion in market value this year. European Central Bank board member Panetta has also publicly warned that the current energy crisis is exacerbating financial stability risks, particularly impacting highly leveraged sovereign debt, non-bank financial institutions, and regions most vulnerable to capital outflows. In other words, the market is not trading "immediate recession" but rather pondering whether fragile credit chains might start breaking down if high oil prices persist. Although not without uncertainty, every indicator can give off false positive signals, as has happened many times in recent years. However, if this indicator proves accurate again this time, it does not anticipate a stock market crash like in 2008 or 2020. If investors pay attention, the current trend is more like what happened in 2000, likely pointing to a gradual and slow decline. From peak to trough, it took 943 days for markets to absorb all the consequences of the bursting of the internet bubble, far longer than the 517 days during the subprime crisis. This time, there is almost no room left for the Fed's benchmark interest rates, which have historically saved the markets countless times. Regardless of how the current trend evolves, there is a fundamental reason why investors increasingly believe this ratio will not experience a significant decline the limited downside/upside space in the numerator. In fact, while the current energy crisis may lead to higher inflation rates, the Fed does not have an obvious interest rate policy option this time. The central bank's room to cut rates is minimal because that would further push up inflation; but it also cannot choose to raise rates against the tide because labor markets are weaker than in 2022. Jeffrey Sherman, deputy CIO of DoubleLine Capital, a major fixed income asset investor on Wall Street, recently stated in a media interview that Fed policymakers should avoid overreacting to the new round of inflation driven by oil prices and should continue to focus monetary policy on the already weakened labor market conditions. Sherman further noted in the interview that the significant spike in international oil prices is a form of monetary tightening in itself, so the Fed may not need to intervene further. Market strategists from Goldman Sachs also outlined similar views in a recent research report: markets are overreacting to the oil shock, betting that the Fed will implement a tightening policy, which is unlikely based on historical experience. Therefore, even if the US economy continues to slow down, the federal funds rate may remain unchanged; meaning everything depends on the junk bond spread. In other words, how low-rated companies will weather what could be the most severe energy crisis in history. Usually, they are very fragile. When a company is already under financial pressure, a global energy crisis is the last thing you want to see. There is currently no perfect indicator in the financial markets that can accurately predict every recession over decades, but without a doubt, this indicator, which has been highly reliable for the past thirty years, is signaling the possibility of a US economic recession in the coming months, as it has dropped below the 100-period moving average and then rebounded. We are now in the downward phase after that rebound, which is often the most dangerous phase for the stock market. We will see how things unfold in the future, but in the several deep emergency recessions before, the market bottom always came after this indicator dropped below the crucial 0.15% threshold. We are currently at 1.12%, so we are still far from that level. Undoubtedly, the current financial market pricing curve already carries shades of recession panic, but has not entered a "comprehensive recession pricing" like in 2008 or 2020. More professionally, the market is currently pricing in a "significant rise in growth downward revision probability," rather than an "inevitable recession." On one hand, recent data shows signs of a rebound in manufacturing activity in the US, Europe, and China in March, with mainstream consumer and employment data not slowing down entirely, indicating some resilience in the economic system; on the other hand, Wall Street giant JPMorgan has warned that if supply disruptions in the Strait of Hormuz continue until mid-May, oil prices could rise to $120 to $130, or even exceed $150 in extreme cases, leading to a significant rise in demand destruction and global economic recession risks. This means that the market is in a "recession alert" phase rather than a "recession confirmation" phase; if the situation in the Middle East does not calm down, and the Strait of Hormuz remains closed for the long term, recession panic will quickly escalate. If geopolitical tensions ease, this round is more likely a stagflationary panic driven by high oil prices rather than a full plunge into recession.