Over extended periods, the stock market has consistently outperformed other asset classes, such as gold, oil, housing, and Treasury bonds, in terms of average annual returns. However, when focusing on shorter time frames, the outlook becomes less certain.
In the past four years, the Dow Jones Industrial Average (DJINDICES: ^DJI), the S&P 500 (SNPINDEX: ^GSPC), and the Nasdaq Composite (NASDAQINDEX: ^IXIC) have experienced alternating periods of bear and bull markets.
While there is no foolproof method for accurately predicting short-term market movements or crashes, investors often seek to gain an advantage through various means.
Despite the lack of a concrete way to forecast the future direction of major stock indexes, a select number of metrics and predictive indicators have shown strong correlations with market movements.
One such indicator that has recently attracted attention is the recession probability indicator developed by the Federal Reserve Bank of New York.
For over six decades, this tool has analyzed the spread between the yields of the 10-year Treasury bond and the three-month Treasury bill to assess the likelihood of a U.S. recession occurring within the next 12 months.
Typically, the Treasury yield curve slopes upward, indicating that longer-term Treasury bonds offer higher yields compared to shorter-term T-bills. This relationship is expected, as longer investment periods in interest-bearing assets should yield higher returns.
