The Test Bench › gate
Does Recession Monitor (3M/10Y + 2Y/10Y inversion) actually work?
DEADNo edge left once tested on a fair footing.
The claim
A chart-based signal that times the market — Yield-curve / recession watchers
What we did
Tested against Buy & hold SPY, same window, 2010-2026, ONE inversion in-window (2022).
The result
Result: -0.09 dSharpe (vs buy-hold); OOS -0.17
Both-inverted as an equity gate HURTS: dSharpe -0.09 (-0.17 OOS); the 14-month recession window worse (-0.12/-0.25)
Verdict
The Fed-staple yield-curve signal -- 3-month/10-year AND 2-year/10-year both inverted -- tested as an equity gate. As a market timer it UNDERPERFORMS buy-and-hold in every version (out-while-inverted -0.09, the ~14-month recession window -0.12), worse out-of-sample. The one inversion in our window (2022) preceded NO recession and a rising market -- the 'nine of the last two recessions' problem. It is a recession FORECASTER, not an equity timer; the forecasting claim itself needs longer history and NBER dates to test fairly (our spread copy starts 2010 -- a single inversion).
What the test did and did not do
- tested out of sample
- point-in-time data
- checked for look-ahead
- net of real costs
Almost nobody publishing a backtest says which of these they did. We list the ones we failed as well as the ones we passed.
Tested 2026-06-23. The same treatment, applied to every other system, is on the test bench.
Written with AI assistance from our own test database. The numbers are computed, not composed.
General market commentary for education, not personalised investment advice. Backtested results are hypothetical. Trading carries a real risk of loss.