The power of the yield curve and how it affects the economy has been a hot topic lately. When a yield curve inversion occurs, the economy is likely to slip into a recession – eventually.
History tells us that a recession can occur up to two years later. During the time between an inversion and a recession, the stock market has actually performed well. In many cases, indexes have gone up by double-digits.
About that recent yield curve inversion…
So why are so many analysts worried about a recession now?
First, it’s been more than 10 years since the last one in 2008-2009, which was a doozy.
Second, recessions typically happen every five years, so we are “overdue” for one. For those of us who live in California, we are used to calls for the next big earthquake. We ignore them. Earthquakes, like recessions, are difficult to predict.
Yes, a recession will happen “some day”. Why waste time trying to time it? Instead, you need to prepare for it.
And that leaves analysts and economists worried. Even though a recession is a normal part of the economic cycle, too many people are not prepared for the hardships to come. We are back to where we were in 2007, with countless households carrying elevated levels of debt, upside-down mortgages and little-to-no savings. A recession will aggravate their already-perilous financial positions, and it might not end quickly. Recessions can last months or years. Either way, it will inevitably brings job losses and an increase in company bankruptcies and outright closures.
Even today, many industries and workers have not recovered from the Great Recession. That is certainly on the Fed’s mind, which is likely one of the reasons they cut rates last week. After the rate cut, the yield curve inversion flattened out a bit. But we are not out of the woods.