The Recessionist model reads 57/100 with 10/20 indicators triggered—firmly in PRE_RECESSION phase. Credit spreads widening (3%), unemployment rising (4.6%), consumer sentiment crushed (51). Yet VIX sits at a sleepy 14.9 and the yield curve is positive (+0.69%). This is the classic late-cycle trap: the economy looks fine until it doesn't.
TL;DR: What You Need To Know
Where We Are: Late-cycle with 10/20 warning indicators triggered. Score: 57/100.
What The Model Says: DEFENSIVE positioning recommended. High-growth tech at nosebleed valuations is vulnerable. Defensive sectors (consumer staples, healthcare, utilities) historically outperform during late-cycle transitions.
What To Do: Rotate toward quality over growth. Hold 30%+ cash (T-Bills paying 5%). Own companies with pricing power. Avoid unprofitable tech and leverage.
The Late-Cycle Investment Landscape
Markets are sending mixed signals. Our 20-indicator model shows 10 indicators flashing warning while 10 remain healthy. This is textbook late-cycle: not yet recession, but deteriorating fast enough that defensive positioning is warranted.
The question every investor faces: Should you chase the AI rally or rotate into boring sectors that actually generate cash flow?
Elevated Indicators: The Warning Lights
Credit Spreads Widening: Our model shows credit spreads at 3%—close to the threshold where pain becomes real. When investors demand higher yields for corporate bonds, it signals rising recession risk.
Labor Market Softening: Unemployment hit 4.6% in November—up from 4.2% a year ago. Weekly jobless claims at 224K. Private employers shed 32,000 jobs per ADP.
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Consumer Sentiment Collapsed: University of Michigan sentiment at 51—nearly 30% below a year ago. Low sentiment precedes spending cuts.
Manufacturing Contracting: ISM PMI at 48.2—ninth consecutive month below 50. Manufacturing contraction leads broader weakness by 6-12 months.
Fed Still Restrictive: Fed funds at 3.88%. High rates compress growth stock valuations and restrict credit.
Healthy Indicators: The Counter-Signals
Volatility Low: VIX at 14.9—far below panic levels. Markets aren't scared yet.
Yield Curve Positive: 10Y-2Y spread at +0.69%. Positive curve provides breathing room.
Housing Starts Strong: 1.3 million units annual rate—above stress thresholds.
Sahm Rule Not Triggered: Unemployment only 0.43 points above 12-month minimum. Recession trigger is 0.50.
Defensive Sectors vs. High-Growth Tech
Through mid-2025, technology crushed everything: +26.5% over six months. But by late 2025, rotation began. The Nasdaq dropped 6%+ YTD while Russell 1000 Value gained 1.89% and international stocks climbed 11%.
Defensive Stocks (Past Month)
- Walmart: +8.61% (pricing power, scale)
- Johnson & Johnson: +1.28% (healthcare essentials)
- UnitedHealth: +2.51% (managed care dominance)
- Procter & Gamble: -4.27% (modest pullback)
Tech Stocks (Past Month)
- Nvidia: +1.18% (AI leader, high valuation)
- AMD: +4.74% (semiconductor exposure)
- Microsoft: +2.92% (cloud + enterprise)
- Amazon: +3.02% (e-commerce + AWS)
- Oracle: -3.09% (correction)
Tech returns are more dispersed, more sensitive to sentiment, more risky.
The AI Bubble Question
Howard Marks of Oaktree Capital distinguishes between inflection bubbles (speculative manias that finance transformative infrastructure) and mean-reversion bubbles (pure wealth destruction).
The AI boom may be an inflection bubble. Capital flowing to AI finances data centers, semiconductor capacity, and innovation. Investors who weather volatility may benefit long-term.
But bubbles are driven by psychology, not fundamentals. FOMO is dangerous. Chasing AI stocks at lofty multiples after a multi-year rally is exactly what destroyed portfolios in 2000 and 2008.
Common Late-Cycle Investor Mistakes
- Overconfidence: After strong gains, investors feel invincible. Hubris peaks at market tops.
- FOMO: Chasing hot stocks leads to buying overpriced assets.
- Recency Bias: Extrapolating recent trends. A decade of tech dominance ≠ another decade guaranteed.
- Leverage: Margin and options magnify losses during volatility.
- Leaving Your Circle: Investing in AI companies you don't understand increases risk.
What The Model Says To Do
Current Recommendation: DEFENSIVE
Timeline: 6-12 months elevated risk
Allocation: 40% stocks / 30% bonds / 30% cash
Specific Actions
1. Increase T-Bill Exposure (30%)
SGOV, BIL, SHY—ultra-short Treasury ETFs yielding ~5% with zero duration risk.
2. Own Defensive Leaders
Procter & Gamble, Costco, Walmart (staples), Johnson & Johnson, UnitedHealth (healthcare), Berkshire Hathaway (diversified).
3. Selective Tech—Quality Only
Microsoft, Amazon, Apple—strong balance sheets, proven earnings. Avoid unprofitable startups.
4. Avoid: Unprofitable tech, high-multiple growth stocks, long-duration bonds, leverage.
Conclusion
The Recessionist model at 57/100 with 10/20 indicators triggered says we're in late-cycle transition. Not recession yet—but elevated risk requires defensive positioning.
High-growth tech promises AI transformation but carries extreme valuation risk. Defensive sectors offer stability and income but lag during rallies. The right answer isn't all-in on either.
Use a barbell strategy: Pair safety (cash + T-Bills) with quality growth (profitable tech leaders). Maintain exposure to essential businesses. Avoid leverage and speculation.
The bottom isn't here. 10/20 indicators triggered means 50% of buy signals are missing. Patience pays.
Data as of December 21, 2025. Recessionist Pro model score: 57/100. Phase: PRE_RECESSION.