Recession warning signs to watch: Moody’s Analytics model signals a potential US recession within the next year, citing a 48% probability. Declining residential building permits contribute to this concern, while high stock valuations add to the risk. Historically, recessions are temporary, and long-term investments have proven profitable, offering reassurance to investors.
Recession warning signs to watch: Wall Street has been on a rollercoaster ride this year, swinging from sharp losses to record highs in a few days’ time. But beneath the wild market swings, a new warning indicator has appeared, one with an untarnished 65-year track record.
Soon after US president Donald Trump unvield his tariff and trade policies in early April 2025, the US’s leading stock indexes, S&P 500, Dow Jones Industrial Average, and Nasdaq Composite, all took a hit, as per a report. The S&P 500 and Dow plummeted into correction territory, while the Nasdaq dipped into its first bear market since 2022. But optimism made a return a week later as Trump pledged a 90-day tariff truce, pushing the markets to new record highs.
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Despite these dramatic market fluctuations, one machine-learning algorithm created by Moody’s Analytics is ringing a dire warning for the US economy, as per a report. That model takes decades of economic history, back to 1960, and predicts probabilities of a recession in the next 12 months, as per The Motley Fool report.
Mark Zandi, Moody’s Analytics’ chief economist, reported that the model now has a 48% probability of a US recession next year, according to the report. While that figure has not yet reached the 50% level that has traditionally led to a recession, any figure above 40% has also been a good indicator that a recession is coming, as reported by The Motley Fool.
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The model points to residential building permits as a leading indicator. While they held steady for some time, permits have recently dropped to pre-pandemic depths, a sign of impending difficulty for the housing market and general economy, according to the report. Zandi said, “As builders supported sales through interest rate buydowns and other incentives, inventories of unsold homes are now high and on the rise,” as quoted by The Motley Fool.
This warning comes at a time when stock valuations are already high. The S&P 500’s Shiller Price-to-Earnings ratio is nearing its second-highest level in 150 years, a historical sign that the market may be vulnerable to a sharp correction, as per The Motley Fool report.
Nevertheless, it’s worth keeping in mind that recessions, though unpleasant, are part of the usual economic cycle. They are usually fairly brief, lasting an average of just 10 months since World War II, and are frequently followed by periods of growth, as per the report.
Long-term data also offers comfort to investors. Crestmont research indicates that regardless of when you bought the S&P 500 over the past 120 years, sticking with your investment for 20 years has always meant taking home a profit, as per The Motley Fool. That even includes times of war, recessions, depressions, and pandemics, the stock market has remained resilient, with the S&P 500 higher, on a total return basis, for every 20-year period since 1900, according to the report
So, although Moody’s Analytics’ machine-learning model gives us a sobering glimpse of risks on the horizon, it must not be a call to panic, as per The Motley Fool.
Is it safe to invest during a recession?
Historically, long-term investors who stayed invested for 20 years always saw gains, even through tough times, as per The Motley Fool report.
What caused the big swings in the stock market this year?
Changes in trade policies and tariffs announced by President Trump caused major ups and downs in the market, as per The Motley Fool report.
