Wells Fargo Sees 23.5% Recession Probability In Next Six Months

Global economic growth concerns, particularly in emerging markets, have weighed on the S&P 500 so far in 2016 and have led to speculation that the United States could be on the verge of a recession. In a new report, Wells Fargo analyst John Silvia discussed the factors impacting the firm’s various recession prediction models.

Although Wells Fargo’s official Probit model puts recession risk at only 23.5 percent in the next six months, the firm also monitors seven additional models, which estimate recession probability based on a number of different sectors of the U.S. economy.

Currently, the highest risk indicated by any of the eight models is 76.2 percent (based on IP, S&P 500 Index and the CRB Index) and the lowest risk is only 3.6 percent (based on yield spreads). Overall, the average of the eight models indicates a 37.3 percent recession risk.

“Given that recession probabilities based on our official model and the average of all models are somewhat elevated relative to the past few years, it is not wise to dismiss recession risk,” Silvia cautioned.

Traders that believe that Wells Fargo’s models are underestimating the likelihood of recession should consider the SPDR Gold Trust (ETF) (NYSE: GLD) and the iPath S&P 500 VIX Short Term Futures TM ETN (NYSE: VXX).

Disclosure: The author holds no position in the stocks mentioned.