There is recent news of an inverted yield curve. This is when the rate of return for 3 month treasury bonds beats the rate of return of a 10 year treasury bond. If that sounds unnatural to you that’s because it is. Essentially, the inverted yield curve shows that the market has little confidence in the near term economy because there is a much higher demand for long-term bonds than short-term. Therefore, the rate of return for short-term bonds is increased to try to increase demand.
This is an indicator of an potential recession. According to Forbes there is a 25-30% chance of a recession in 12 months time. While it is not definitive that there will be a recession in a year, it is a sign for a potential recession. But it could be just a self-fulfilled prophecy. Either way people are in a panic. The stock market took a plunge with an almost 80 point loss in the S&P 500 since the inversion.
Should You Panic From The Inverted Yield Curve?
Of course not. First, this is just a sign. There is at least a 70% chance there will be no recession in the upcoming year. Second, even if a recession is guaranteed, on average the market tops out 8 months after the first sign of an inversion. There are potential gains you could miss if you just pull out. And third, did you not learn anything when I said you should not panic from your losses in the market?
Signs of recessions are present almost every year. However, the inverted yield curve is a stronger indicator than most every other indicator in previous years. With the longest bull run in US history, there is more potential for falls than in previous years. There is potential for growth after a recession though. I will bring up how to do so in my next post. Note that a recession and setbacks are just stumbles on the path to forge your wealth.