To The Moon

$S&P 500(.SPX)$ $Invesco QQQ(QQQ)$

Something remarkable just happened in the U.S. economy—one of its most powerful indicators is sending a clear, urgent warning to investors. The Bureau of Labor Statistics (BLS) has revised job growth downward by nearly a million, an adjustment that is not only unprecedented in size but also worse than revisions made during the 2009 Global Financial Crisis (GFC).

This isn’t just an obscure data point buried in government reports. The labor market is the backbone of the American economy, driving 70% of GDP through consumer spending. When payrolls contract, the ripple effects extend through corporate earnings, household spending, and eventually the stock market. Paired with falling Treasury yields and unusual behavior in money markets, the picture emerging is one of an economy that may already be in recession—or heading toward one with high probability.

The central question for investors is whether this will trigger a deep stock market crash or a slower, grinding bear market. To unpack this, let’s walk through three major steps: the labor market shock, the interest rate signals, and the implications for recession risk and equities.

Step One: A Historic Shock in the Labor Market

The BLS recently revised nonfarm payrolls lower by almost one million jobs, covering the period from April 2024 through March 2025. On paper, this changes the entire narrative of U.S. economic strength.

For context, after the pandemic-era disruptions, the labor market appeared to stage a robust recovery beginning in 2021, with payrolls growing by several hundred thousand per month. At the time, this was heralded as evidence of economic resilience. But as the revisions now show, that strength was overstated. Instead of consistently strong job creation, the true underlying trend has been a steady decline.

Most concerning is the fact that recent months have now registered negative job growth. Historically, this is extremely rare outside of recessions. Going back decades, negative nonfarm payrolls almost always coincide with either a recessionary environment or a sharp contraction.

The downward revisions also imply that many months in 2024, which were initially reported as modestly positive, were in fact negative. If we had seen real-time, accurate data, the weakening trajectory would have been clear much earlier.

Why Jobs Data Matters More Than Almost Any Other Indicator

The U.S. economy is consumption-driven, with household spending accounting for roughly 70% of total GDP. That means employment isn’t just another data point—it’s the engine that sustains aggregate demand.

• Fewer jobs → reduced purchasing power.

• Lower consumption → weaker business revenues and earnings.

• Falling profits → layoffs and cost-cutting.

• Layoffs → even fewer jobs, compounding the cycle.

Economists call this the labor market doom loop. Once unemployment rises, it sets in motion a self-reinforcing cycle of weaker demand and further job cuts. Historically, once payrolls turn negative and stay negative, recessions follow.

Step Two: The Bond Market Confirms the Slowdown

While payroll revisions shocked economists, the bond market has been quietly signaling weakness for months.

Despite mainstream narratives about “rising interest rates,” the reality is that yields across the Treasury curve have declined in 2025.

• The 2-year Treasury has dropped from about 4.24% in January to 3.54% today—a fall of nearly 70 basis points.

• The 10-year Treasury has moved down from roughly 4.56% earlier this year to around 4.08%.

• Even the 30-year Treasury has slipped, though modestly, from 4.78% to 4.72%.

This runs counter to the popular story that foreigners are “dumping Treasuries” and that yields are surging. In reality, falling yields indicate rising demand for safe assets. Investors are buying Treasuries not because they’re optimistic, but because they expect slowing growth and declining inflation—exactly the story the labor market is now confirming.

The Reverse Repo Puzzle

Perhaps the most telling sign comes from comparing the reverse repo (RRP) rate to Treasury yields.

At present, the Fed’s reverse repo facility pays 4.25%. In theory, money market funds and institutions could park cash there, risk-free. Yet, many are choosing instead to buy 2-year Treasuries yielding just 3.54%.

Why would anyone accept a lower yield? The answer lies in expectations. These institutions believe that over the next two years, interest rates will fall sharply—perhaps to levels near 1%. Locking in even 3.5% today would then prove advantageous compared to rolling short-term cash at much lower rates in the future.

This divergence between the RRP rate and Treasury yields reveals a powerful consensus among sophisticated investors: the economy is headed for a significant slowdown, and the Fed will be forced into substantial easing.

Step Three: Recession Probability and Market Outlook

So where does this leave us? Taken together, the labor market and bond market point to an economy already weakening beneath the surface.

Recession Probability

Looking at historical precedents:

• Negative payrolls almost always coincide with recessions, barring unusual one-off events like strikes or hurricanes.

• This time, the decline is not a blip but a sustained downward trend beginning in 2021.

• With revisions, 2024 likely had multiple negative months, and 2025 could see even more.

On this basis, the probability that the U.S. is already in recession—or imminently entering one—is around 85%.

Stock Market Implications

The bigger question for investors: what does this mean for equities?

Here, valuations matter. Historically:

• In 1974, 2000, and 2008, recessions coincided with elevated P/E ratios, leading to deep bear markets and, in some cases, outright crashes.

• In the early 1980s, the U.S. endured a sharp recession but with low starting valuations, the stock market decline was relatively mild.

Today, valuations are near record highs, exceeding levels seen in 1974 and 2008, and approaching the extremes of the dot-com bubble. That makes equities particularly vulnerable.

Crash vs. Slow Bear Market

Not all recessions produce crashes. The outcome depends on both severity and policy response.

• If the U.S. experiences a GFC-style crisis, policymakers will almost certainly intervene aggressively with fiscal and monetary support. In that scenario, the probability of a sustained 30–50% market crash is relatively low—around 20%—because stimulus would cushion asset prices.

• If the U.S. instead faces a “garden variety” recession, marked by slow but persistent weakness, the risk is actually higher. Without a crisis forcing immediate action, equities could grind steadily lower. In this case, the probability of a 20–40% decline rises to 40–50%.

The Investor Takeaway: Strategies for a Fragile Environment

For investors, the worst mistake now is complacency—simply “buying the dip” under the assumption that markets always rebound quickly. With payrolls trending negative, yields falling, and valuations stretched, risks are elevated.

That doesn’t mean panic is the right response. It means thoughtful positioning is essential. Some strategies to consider include:

1. Increase Cash Reserves – Cash provides optionality. With yields on short-term Treasuries still above 3%, investors can earn modest returns while keeping dry powder ready for opportunities.

2. Defensive Sectors – Healthcare, utilities, and consumer staples historically hold up better in downturns.

3. Quality Over Growth – Companies with strong balance sheets, consistent free cash flow, and sustainable dividends are more likely to weather recessions.

4. Diversification Across Assets – Gold, certain commodities, and defensive alternatives can help hedge against volatility.

5. Selective Opportunism – Bear markets often produce bargains in high-quality names. The key is patience and discipline, waiting for valuation resets.

Conclusion: Preparing for Probabilities, Not Certainties

There are no guarantees in markets—only probabilities. Right now, those probabilities suggest the U.S. economy is either in recession or on the cusp of one. The labor market is flashing red, Treasury yields are confirming weakness, and valuations are dangerously elevated.

A sharp crash is less likely than a grinding bear market, but either way, the risks to equity portfolios are substantial. The good news is that investors who prepare—by holding cash, focusing on quality, and diversifying—can not only protect their wealth but also position to take advantage of opportunities that will inevitably arise in the next cycle.

In a world of slowing growth, falling rates, and interventionist policymakers, resilience and discipline matter more than ever.