Trust Your Gut: This "Rally" Feels Wrong for a Reason

The stock market has experienced significant turbulence recently. Is the worst behind us? Or could it get a lot worse before all is said and done?

No one can say for sure, but multiple key indicators suggest there’s a lot more downside to come.

In this article, we examine everything from the yield curve to CAPE ratios to gain a sense of where we are, and where we might be headed next.

Yield Curve Inversion: A Recessionary Harbinger

First up is what some believe to be the best recession indicator of all time. The yield curve inverting, and then un-inverting, has historically been a nearly perfect recession indicator. With the yield curve snapping back to normal after being inverted for so long in 2024, many investors brace for a recession to begin in 2025.

Even the Fed has increased its forecast for a recession. This is definitely something you want to keep an eye on.

Auto Loan Market: Rising Delinquencies and Declining Sales

The auto loan sector exhibits significant signs of stress as the number of delinquent loans (90 days or more) continues to grow and surpasses the long-term average.

Wilbert van der Klaauw, Economic Research Advisor at the New York Fed, noted that “high auto loan delinquency rates are broad-based across credit scores and income levels.”

Whenever consumers struggle to meet debt obligations, it reflects underlying financial instability that can lead to reduced consumer spending– and recession.

Mortgage Delinquencies: A Growing Concern

It’s not just auto loans, but mortgage delinquencies are on the rise too. The national mortgage delinquency rate continues to increase back toward 2022 levels. This trend underscores vulnerabilities in the residential and commercial real estate markets.

Freddie Mac reported that single-family delinquency rates increased from 0.59% in December to 0.61% in January and that their multifamily delinquency rate increased from 0.40% in December to 0.42% in January.

Multifamily loans, which are frequently adjustable-rate loans, react faster to rate hikes. But we still need to wait to see what will happen to single-family loans, which after the 2008 crisis tend to be mostly fixed rate.

And according to the Mortgage Bankers Association, the seasonally adjusted mortgage delinquency rate increased for all loans outstanding in the last quarter of 2024.

“By stage, the 30-day delinquency rate decreased 9 basis points to 2.03 percent, the 60-day delinquency rate increased 3 basis points to 0.76 percent, and the 90-day delinquency bucket increased 11 basis points to 1.19 percent.”

More economic pain could come from the already weakening housing market as more single-family loan maturities come due.

Corporate Bankruptcies and Layoffs: An Alarming Trend

Corporate bankruptcies have surged, reaching a 14-year high in 2024, with 694 public and private companies filing for bankruptcy.

This surpasses the previous peak during the pandemic in 2020 and reflects mounting financial pressures on businesses.

The increase in bankruptcies often correlates with rising layoffs, further exacerbating economic concerns.

This trend may only get worse as there is a wall of maturity to climb ahead, assuming rates don’t change in the meantime.

For an in-depth analysis of corporate debt maturities and their potential impact on the economy, refer to our 2025 Gold Outlook Report.

Falling Oil Prices: Reflecting Global Economic Woes

Oil prices have plummeted to their lowest levels since 2021, with West Texas crude oil futures hitting a session low of $58.95 per barrel.

Generally, falling oil prices can indicate weakening consumer demand and economic slowdown that often are a leading sign towards a recession.

Such a significant and sudden drop in oil prices often signals concerns about reduced global demand and a potential economic slowdown.

Growing High-Yield Spread: Rising Credit Risk

The ICE BofA US High Yield Index Option-Adjusted Spread widened to 4.01% in April 2025.

An increasing spread between high-yield (junk) bonds and Treasury securities reflects heightened perceived credit risk in the market.

This widening indicates that investors demand higher compensation for taking on additional risk, often a precursor to tighter financial conditions and potential defaults.

While this indicator isn’t screaming recession yet, it certainly bears close monitoring.

CAPE Ratio: Elevated Valuations Signal Caution

Robert Shiller demonstrated using 130 years of back-tested data that the returns of the S&P 500 over the next 20 years are strongly inversely correlated with the CAPE ratio at any given time.

In other words, whenever The Cyclically Adjusted Price-to-Earnings (CAPE) of the market is high, it means stocks are overvalued and returns over the next 20 years likely will be poor.

In contrast, whenever the ratio is low, it means the stocks are undervalued and returns over the next 20 years likely will be good.

The CAPE ratio for the S&P 500 currently stands near 33 as of April 6, 2025. While this represents a slight decrease from previous months, it remains significantly above historical averages.

Elevated CAPE ratios suggest that the stock market may be overvalued, potentially indicating a long way down if the current market correction continues in force.

What About Gold and Silver Prices?

Amid these economic uncertainties, investors often turn to precious metals like gold and silver as safe-haven assets.

So how has gold performed in the 21st century compared to stocks?

This chart compares the performance of the S&P 500 in red, the Dow Jones in blue, Gold in gold, and Silver in silver.

What about in the first quarter of 2025? Gold smoked the competition.

Gold was the best-performing asset in the first quarter of 2025 and held its own against this broader market selloff. And not only held its own but continued to rise in price, hitting a new all-time high as of Friday, April 14th.

Regular readers of Monetary Metals commentary will know that this is synonymous with the dollar hitting an all-time low.

The resilience and ascent of gold in this environment is remarkable. And it’s consistent with what we described in our Gold Outlook 2025.

Though even we are a bit surprised by how picture perfect this is playing out.

In conclusion, a confluence of economic indicators points to potential further declines in the stock market while gold once again is proving itself to be a financial anchor in the economic storm.