Andrew T. from Nashville, TN asks: Hello Mitch, I can recall from some of your previous writings that an inverted yield curve has usually been an accurate recession predictor. But I’ve noticed recently that the yield curve has been inverted for a long time with no sign of recession. What changed this time around?
Mitch’s Response:
Thanks for sending your question, Andrew. You’re absolutely correct—the yield curve, which measures the difference in yield between short-duration U.S. Treasuries and long-duration Treasuries, has historically been a reliable recession indicator. The chart below shows the 3-month/10-year U.S. Treasury bond yield curve going back to 1980. The red circles show yield curve inversions and the gray bars show recessions. The correlation between the two is evident and shows up if we go back even further in history to the previous eight downturns.1
Expert Insights for Handling Market Fluctuations
In volatile times, it’s easy for investors to fall into emotional decision-making. When the market takes a turn, what’s the next step?
To start, I would recommend finding ways to eliminate volatility instead of avoiding it. To help you find a better approach for dealing with market changes, I’m offering our free guide, ‘Helping You Manage Market Volatility3.’ You will have access to expert insights, including:
• Market downturns can and will occur, but what should you do?
• How can diversification help you manage volatility without compromising your returns?
• When volatility is too much for you to handle, how can a money manager help?
• Can volatility actually be an opportunity?
If you have $500,000 or more to invest and want to get answers to the questions above, click on the link below to download this guide today!
Download Zacks Volatility Guide, “Helping You Manage Market Volatility.”3
Since 1968, it has taken anywhere from 9 to 24 months after a yield curve inversion for a recession to take hold. In the current cycle, the yield curve inversion enters its 24th month in June, with no sign of recession in the United States. Employers continue to add new jobs every month, consumer spending remains strong, wages are rising, and inflation appears to be anchored around 3%. Corporate earnings also continue surprising to the upside.
There is no simple explanation for why a recession hasn’t followed the current yield curve inversion. One reason I’ve floated is that the economy and U.S. corporations are already flush with cash—bolstered by strong economic growth, strong earnings, and trillions of pandemic stimulus dollars. Given that an inverted yield curve tends to compress bank net interest margins, we would expect lending activity to decline—which could dampen economic activity and trigger a downturn. A cash-rich economy, on the other hand, may not feel the impact of softening bank lending as much as it has historically.
Another possible explanation is that a recession is in the offing, it’s just taking longer to materialize in this cycle. That’s quite possible, but it’s not something I’m seeing in 2024. I think we’re likely to get a rate cut from the Fed sometime later this year before a recession is evident. That could lead to a decline in short-term Treasury yields and a flattening of the yield curve, perhaps deeming the inversion indicator moot by early-to-mid next year.
If there’s a lesson to take away here, it’s that relying on a single indicator to predict U.S. economic activity is not sufficient. The U.S. economy is vast and complex, and simply cannot be explained by the bond market alone.
Although the future is unpredictable, there are ways investors can navigate through the economy’s ups and downs. I recommend downloading our free guide, “Helping You Manage Market Volatility4, which offers expert guidance on how to keep a steady course in a turbulent market. You’ll get answers to questions, such as:
• Market downturns can and will occur, but what should you do?
• How can diversification help you manage volatility without compromising your returns?
• When volatility is too much for you to handle, how can a money manager help?
• Can volatility actually be an opportunity?
If you have $500,000 or more to invest and want to get answers to the questions above, click on the link below to download this guide today!
Disclosure
2 Fred Economic Data. June 3, 2024. https://fred.stlouisfed.org/series/T10Y3M
3 ZIM may amend or rescind the guide “Helping You Manage Market Volatility” for any reason and at ZIM’s discretion.
4 ZIM may amend or rescind the guide “Helping You Manage Market Volatility” for any reason and at ZIM’s discretion.
DISCLOSURE
Past performance is no guarantee of future results. Inherent in any investment is the potential for loss.
Zacks Investment Management, Inc. is a wholly-owned subsidiary of Zacks Investment Research. Zacks Investment Management is an independent Registered Investment Advisory firm and acts as an investment manager for individuals and institutions. Zacks Investment Research is a provider of earnings data and other financial data to institutions and to individuals.
This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. Do not act or rely upon the information and advice given in this publication without seeking the services of competent and professional legal, tax, or accounting counsel. Publication and distribution of this article is not intended to create, and the information contained herein does not constitute, an attorney-client relationship. No recommendation or advice is being given as to whether any investment or strategy is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole.
Any projections, targets, or estimates in this report are forward looking statements and are based on the firm’s research, analysis, and assumptions. Due to rapidly changing market conditions and the complexity of investment decisions, supplemental information and other sources may be required to make informed investment decisions based on your individual investment objectives and suitability specifications. All expressions of opinions are subject to change without notice. Clients should seek financial advice regarding the appropriateness of investing in any security or investment strategy discussed in this presentation.
Certain economic and market information contained herein has been obtained from published sources prepared by other parties. Zacks Investment Management does not assume any responsibility for the accuracy or completeness of such information. Further, no third party has assumed responsibility for independently verifying the information contained herein and accordingly no such persons make any representations with respect to the accuracy, completeness or reasonableness of the information provided herein. Unless otherwise indicated, market analysis and conclusions are based upon opinions or assumptions that Zacks Investment Management considers to be reasonable. Any investment inherently involves a high degree of risk, beyond any specific risks discussed herein.
The S&P 500 Index is a well-known, unmanaged index of the prices of 500 large-company common stocks, mainly blue-chip stocks, selected by Standard & Poor’s. The S&P 500 Index assumes reinvestment of dividends but does not reflect advisory fees. The volatility of the benchmark may be materially different from the individual performance obtained by a specific investor. An investor cannot invest directly in an index.