The recession is coming! The recession is coming! It's a certainty, right? It must be, because all of the financial news networks are talking about it non-stop every day.
This month's popular topic is the inversion of the yield curve. You've probably been talking about it over dinner! An inverted yield curve occurs when short-term Treasuries yield more than long-term Treasuries. Just think, a three-month Treasury now pays more than a 10-year Treasury for the first time since 2007. Sounds simple enough, but it's rare and yes, it can be an indicator of a recession to come. With rates already at historic lows and the President imploring the Fed to lower rates, why is an inverted yield curve an important data point and how can we put it in perspective? Below is some key information*:
• Consider every recession back to the 1950s (9 in total) was preceded by an inversion.
• But not every inversion led to a recession. In fact, Japan, the United Kingdom, and Germany have also had inversions without recessions.
• Stocks tend to do well for some time after inversions. On average, the S&P 500 index peaked about a year after an inversion and the previous 5 recessions didn't even begin until about 21 months after an inversion.
• Lastly, the Fed Funds rate (the short-term rate set by the Federal Reserve) is usually much higher at times of inversion. Historically the rate has averaged about 6%, but its only 2.4% today.
An inverted yield curve could suggest trouble ahead for the economy, but don't forget that economic growth and potential stock market gains can continue for years after the initial inversion. In the meantime, we remain vigilant by maintaining globally diversified portfolios, keeping costs as low as possible, holding high quality individual bonds when applicable, and utilizing life and long-term care insurance strategies to help mitigate current and future risks to each of our clients' wealth and financial plans.
*11 Things You Need to Know About the Yield Curve, LPL Financial, 3/28/19.
The opinions voiced in this material are for general information only and are not intended to provide
specific advice or recommendations for any individual. All performance referenced is historical and is
no guarantee of future results. All indices are unmanaged and may not be invested into directly.
Investing involves risk including loss of principal. The economic forecasts set forth in this material may
not develop as predicted and there can be no guarantee that strategies promoted will be successful.
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