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Is The Next Recession Near? Inverted Yield Curve

An inverted yield curve is a fairly strong sign of an impending recession. With this event, you should try to prepare for a recession.

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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?

Final Thoughts

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.

Author: Papa Foxtrot

Most of my life I was careful with money and learned where I should invest it. I was very lucky to have parents who taught me financial literacy when I was young. Unfortunately, I am very lucky because many people lack the financial literacy I know. The purpose of Forge Your Wealth is to teach people who are just starting out in life how to obtain their wealth or anyone who just realized they may need to learn more to handle their finances. I currently have a PhD in biochemistry, just started a job in industry (will not disclose where exactly for personal and professional reasons) and am currently married to the love of my life. I am one of the lucky few people in America who graduated with no student debts, my wife was not. Over the series of a little over 3 years we paid for our wedding with no debt and paid off her federal student loans.

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