Over the last 40+ years, any time the yield on the 10-year U.S. Treasury bond has fallen below the yield on the 3-month U.S. Treasury bond – an ‘inverted yield curve’ – the U.S. economy has dipped into a recession. As readers can see in the chart below, the yield curve is now firmly in inverted territory1:
U.S. Yield Curve (10-Year U.S. Treasury Minus 3-Month)
Another common look at the yield curve is comparing the 2-year U.S. Treasury bond yield to the 10-year, which doesn’t look any better – as of the end of last week, the difference between the two was 0.78%, marking the largest negative gap since 1981. In that instance, a major recession followed.
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There have been continuous talks about whether a recession is around the corner. Even if it is, I suggest that you navigate through the uncertainties in this economy by looking into key forecasts and data.
To give more insight into how to protect your investments during this time, I am offering all readers a first look into our just-released December 2022 Stock Market Outlook report.
This report will provide you with key forecasts along with additional factors to consider:
- What fundamentals are U.S. stock markets pricing in?
- Setting U.S. return expectations for 2023
- Zacks forecasts at a glance
- What’s ‘fair value’ on the S&P500?
- And more…
If you have $500,000 or more to invest and want to learn more about these forecasts, click on the link below to get your free report today!
IT’S FREE. Download the Just-Released December 2022 Stock Market Outlook3
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If a recession is on the way, the U.S. consumer has not received the memo. According to Commerce Department data released in mid-November, U.S. retail sales rose by a seasonally adjusted +1.3% in October, signaling a sharp increase in activity from September’s print. Shoppers spent more on everything from staples like gas and food to bigger ticket discretionary items such as cars and furniture.
This brings up another very distinct possibility when it comes to the yield curve: investors may be pricing in a future with lower inflation, not an impending economic downturn. On one level, when longer-term Treasury bond yields are lower than short-term yields, it means investors think the fed-funds rate will be lower in the future than it is now – likely because the Fed will need to cut rates to revive a slowing economy. The market may be betting that inflation will be low enough next year to allow the Fed to take this action.4
In my view, and based on continued strength in consumer spending and labor market data, we could see a scenario where the U.S. consumer buttresses the U.S. economy during the transition to lower inflation, which may take many months yet. In other words, it’s fair to say the inverted yield curve is a strong sign a recession is looming, but I think the U.S. consumer can step in to prevent it from becoming severe or even significant.
Recent spending data support this possibility, in my view. Take Black Friday – according to research firm RetailNext, store traffic was up 7% compared to last year, and Mastercard’s SpendingPulse showed that spending was 12% higher than last year. Looking just at online sales, Adobe Analytics found that purchases on Black Friday rose 2.3% to $9.12 billion when comparing this year to last. Even as inflation raises the prices of most goods and services, Americans are still out spending. The average Thanksgiving week airfare was up a staggering 46% year-over-year, but air travel still went up.
These strong figures continue a trend that has been present virtually all year. Consumer spending rose 0.6% in September from August, and retail sales rose a seasonally adjusted 1.3% in October compared to September. It’s not just the higher-priced food and gasoline consumers are spending more on – it’s also trips to restaurants, home furnishings, and clothing.
To be fair, retail sales reports are not adjusted for inflation, so the higher figures may also be attributed to higher prices across the board. But in a much weaker economic scenario, we would expect these data to be trending downward or showing signs of softening, but we’re just not seeing that today. A big reason is likely that jobs remain plentiful in the U.S., and wages are also higher. So, while U.S. consumers may not like higher prices, they’re in a strong position financially to pay them anyway – which runs counter to a recession outlook.
Bottom Line for Investors
According to Q3 2022 data from the Federal Reserve Bank of St. Louis, consumer spending makes up 68.2% of total U.S. output (GDP). Where the U.S. consumer goes, the economy tends to follow.
That’s why I believe it’s entirely plausible that American consumers can prevent a recession from becoming severe, and perhaps prevent a recession from happening at all. It would be unprecedented in modern times for the yield curve to invert as significantly as it has today without a recession following, but we’re also seeing historical strength in the jobs market which is keeping consumers afloat. If inflation comes down meaningfully before the labor market cools, I could see consumer spending being the key that keeps the economy from faltering.
If you are looking for more insight into what’s next for the market and a potential recession, I recommend reading out Just-Released Stock Market Outlook Report. This report will provide you with key forecasts along with additional factors to consider, such as:
- What fundamentals are U.S. stock markets pricing in?
- Setting U.S. return expectations for 2023
- Zacks forecasts at a glance
- What’s ‘fair value’ on the S&P500?
- And more…
If you have $500,000 or more to invest and want to learn more about these forecasts, click on the link below to get your free report today!
Disclosure
2 Fred Economic Data. November 28, 2022. https://fred.stlouisfed.org/series/T10Y3M#
3 Zacks Investment Management reserves the right to amend the terms or rescind the free-Stock Market Outlook Report offer at any time and for any reason at its discretion.
4 Wall Street Journal. November 29, 2022. https://www.wsj.com/articles/yield-curve-inversion-reaches-new-extremes-11669687278?mod=hp_lista_pos1
5 Zacks Investment Management reserves the right to amend the terms or rescind the free-Stock Market Outlook Report offer at any time and for any reason at its discretion.
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