Recession predictor boosts stock market forecasts, outperforming traditional methods.
The equity premium goes up and down predictably with the economy. It drops before recessions and rises during them. By looking at the difference between long-term and short-term interest rates, we can tell when a recession might start. This helps us predict how well stocks will do. In 1982, there was a big change in how this prediction works. By accounting for this change, we can make even better predictions about the stock market.