Moody's Recession Model Is Just 1 Percentage Point Away From a Signal That Has Never Been Wrong.
Key Points
Moody's AI recession model shows 49% odds of a recession, just shy of the 50% threshold that has preceded every recession in 80 years of backtested data.
Even more worrying, the February data behind the 49% reading doesn't account for the U.S.-Iran war, which has disrupted 20% of global oil production.
While a more conservative investing approach may be warranted, staying invested through volatility has historically been the winning long-term strategy.
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After sliding nearly 6% so far this year, the S&P 500 (SNPINDEX: ^GSPC) could be in for more trouble. Moody's AI-driven recession model just put the odds of a U.S. downturn at 49%. The model was trained on 80 years of backtested data, and every time the odds have tipped above 50%, a recession hit within 12 months.
The Iran War could push Moody's AI recession model over the edge
Here's what makes this especially concerning for investors: That 49% figure is based on February data, meaning it doesn't account for the U.S.-Iran War -- a war that has knocked out roughly 20% of global crude oil production, pushing oil prices well above $100 a barrel.
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The 49% reflects an already soft economy. The U.S. shed 92,000 jobs last month, well below the 59,000 gain economists expected. Gross domestic product (GDP) was revised down from 1.4% to 0.7%, while inflation is still running above the Federal Reserve's target.
Now, with a conflict-driven oil shock, the odds are very good that Moody's model will soon tip above the 50% threshold. After all, every U.S. recession since World War II, aside from the one due to COVID-19, was preceded by a spike in oil prices.
The bottom line
Not everyone agrees, of course. Analysts at Goldman Sachs see only a 30% chance of recession, and plenty of analysts on Wall Street are still bullish.
I think they are overly optimistic. I think there is a very good chance of a recession within the next year. If that happens, markets will suffer.
But that doesn't mean I'm advocating panic selling -- that's never a good idea. While playing things more conservatively right now is the way to go in my opinion, staying invested has always been the winning formula.
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Johnny Rice has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Goldman Sachs Group and Moody's. The Motley Fool has a disclosure policy.
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