Next recession: Fed signal tells Wall Street that crisis is approaching

If you had to choose a single catalyst that explains the rally of the stock market this year, the Federal Reserve would be a solid choice.

The central bank took steps to rebadure markets that it would not raise borrowing costs as aggressively as many feared, given the signs of weakness seen in some markets. parts of the economy. The minutes of his January meeting, released this week, shows that he even badumed some responsibility for the sale at the end of last year.

A more patient Fed can help fill the potholes of the economy and keep the financial conditions flexible enough to continue to fuel the gains of the stock market.

However, some strategists have interpreted the Fed's patience differently: as a signpost marking the end of this cycle of rate hikes. They believe that nascent evidence of a slowdown in the US economy, coupled with the risks introduced by the trade war, are digging a hole that investors will not be able to solve.

"The end of the Fed's tightening cycle is most often a prelude to the recession," said Albert Edwards, strategist at Société Générale, well known for his bearish views on the global economy.

Read more:Two famous recession signals are descending into the danger zone and some Wall Street strategists are convinced that a collapse is fast approaching.

If the Fed has finished, history suggests that the next recession could still unfold in years. According to data from LPL Financial, almost all of the past 40 years, from the latest rise to recession, was nearly three years old.

However, the concern of strategists like Edwards is that the schedule will be shorter this time around.

They note a familiar trend: the Fed raises rates quickly, stops on the signs of tension, then quickly reduces them to contain the current economic crisis. This is what happened recently during the recessions of 2000 and 2008, and that is why the Fed was blamed for all the post-war crises.

Edwards has long warned that the next recession could be so serious that the Fed will have to reduce its interest rates in negative territory, which it has never done before.

Read more: The next recession could force the Fed to lower interest rates in negative territory. Here is what it means and how it could affect you.

He said investors should not ignore the warning signs of the economy and the Fed's reaction.

"Investors could easily be trapped in rejecting the disappointing US economic data recently because of one-off factors such as the very cold weather or the closure of the government," Edwards said in a note to customers. "Investors need to be cautious at this late stage of the cycle."

David Rosenberg, the chief economist of Gluskin Sheff, is already being very cautious. For example, after retail sales fell sharply since 2009 in December, Rosenberg did not consider it an isolated case.

Edwards wrote about Rosenberg: "He calculates that large declines in retail sales of this magnitude are badociated with recessions 80% of the time." Free money may have numbed our senses, but at this point very much late in the business cycle, you have to think hard before getting off the sidewalk. "

In a note exclusively published by Business Insider, Rosenberg added that he thought the next interest rate trend would be downward and not upward.

The legendary economist Gary Shilling also monitors the recession and warned that tightening the Fed could trigger the next. He cites the fact that inflation has remained below the 2% target of the central bank, while the unemployment rate plunged to 3.9%. both metrics have historically a negative relationship.

"The likelihood of a recession starting this year, which I estimate at a two-thirds probability, is also deflationary," Shilling told Business Insider by email. "This would end and reverse the Fed's credit crunch campaign that began in December 2015".

If the tightening of the Fed is really over, stock bulls could still save time. According to LPL Financial, the S & P 500 gained on average 9% and 12% over the six and 12 month periods after the last rate hike.

But the caveat is that investors may have a hard time accepting the Fed's next reversal.