Our Recession Obsession Redux
- cornerstoneams
- Mar 12
- 4 min read
CAMS View from the Corner
March 12, 2025
Back in the late fall season, we offered an edition where, on a light note, we diagnosed ourselves with having, “Recession Obsession.” If you deploy capital throughout various market landscapes, given time, contracting Recession Obsession comes easier than the common cold.
The bottom line susceptibility of this “disease” is a full awareness, at least through historical study, but even better through experiential connection, that most everything changes throughout markets when an incoming recession is expected.
We emphasize “incoming” because collective market participants do not wait for an expected recession to present itself, in current-day reality before adjusting asset prices, be they up or down, throughout various markets.
They read the proverbial tea leaves, and as more evidence builds for an inbound recession, they continually adjust asset prices accordingly. Interestingly, they themselves become an important indicator through the collective wisdom they share by the messaging they leave in the wake of their asset pricing adjustments.
Said collective wisdom is reliable, in particular when viewed through a historical lens. Importantly, the wisdom radiating from the wake of their collective market operations is not foolproof.
Yes, at times they begin to see downstream socioeconomic storylines that do not exist out there on the timeline.
As time unfolds, they realize this and realign prices again toward a different type of expected economic landscape.
On a personal note, with the above in mind, an adage that always resonated with me in succinctly summing up the above is that collective market participants have been known to price into asset markets 7 of the previous 4 recessions.
Those are not meant to be precise numbers but rather act to tell the story of how collective participants can get it wrong as well, via their downstream expectations, as they price asset markets in the current day.
The most important underlying attribute of these participants’ messaging is the obvious; they deploy capital.
For their part, such deployment of capital is not an intellectual exercise based on the theoretical. Rather, they are in the “wrong we lose, right we win” game.
The losses and wins tally up, and if the losses tally up too much, they go broke. This keeps collective participants far more focused than what an intellectual exercise may offer. Consequences, be they positive or negative, are always a fabulous end result to increase focus and discipline.
An “aw shucks,” we got it wrong type of consequence, via a failed theory, doesn’t ring the bell for increased focus and discipline relative to, “oh-no, we are broke!” as a potential outcome.
As offered earlier, this backdrop reality increases their street credibility with, wait for it, collective market participants! Wait, what?
As collective market participants leave signals in the wake of their trading operations, said signals and messaging are then viewed by collective participants as an important indicator or message to act as an additional input for analysis. Talk about a feedback loop.
Additional Inputs for Analysis
We have offered collective market participant messaging, strewn throughout countless editions in the form of streams of market-based pricing behaviors. Adding downstream views of collective participants, via asset pricing today, offers an invaluable addition to an economic observer’s and market operator’s toolbox.
This alone underlines the importance of the message offered from collective market participants via the work they do in pricing assets throughout markets. Even if your analysis convinces you those collective participants are dead wrong, you are wise to at least digest their message.
High-Risk Corporate Bonds
This takes us to yet another observation of market participant messaging.
We have offered in various editions that the bond market is considered one of, if not the smartest market. There is a trove of data that must be continually processed when participating in this market.
High-risk corporate bonds are particularly demanding in terms of the amount of data that must be analyzed. By no means is this a dumb market. High risk can come in various forms, but today we are looking at the category known as high yield bonds, which are also known as junk bonds in slang.
Relative to the economic landscape, these types of corporate bonds are extremely vulnerable to economic weakness, let alone a full-blown recession.
In fitting with market participants pricing assets today, according to what they see downstream, we fully expect to see issues with these types of corporate bonds if said participants see economic issues coming.
Above is a one-year chart of a high-yield corporate bond vehicle on a price basis. Our blue upward-trending arrow highlights the solid trend over the previous year.
Our blue circle highlights the previous couple of months in order to emphasize recent pricing behavior.
Whether we view the larger storyline of the previous year or focus on the pricing behavior of recent months, the message remains the same. These bond market participants, when pricing this asset category today, are not messaging an expected, near-term economic recession.
If they were this economically vulnerable, bond market category would be showing down-trending pricing behavior. Thus far, they are continuing to bid these prices in an overall constructive manner.
Rest assured, if participants begin to fully expect an incoming economic recession, these bonds will put on notable downside.
Importantly, all of the above discusses market participant messaging, not media coverage. Media can signal incoming recession, as an example, but this does not mean market participants across the full spectrum of markets agree with them.
For now the above is another bond market message offering they do not see an imminent economic recession.
This of course is subject to change via market participant positioning, and hence messaging, which is why we monitor their collective operations so closely as a continual forward looking economic input.
I wish you well…
Ken Reinhart
Director, Market Research & Portfolio Analysis
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