Beware: The Inverted Yield Curve

The Inverted Yield Curve: Lets discuss what this means, why it’s important, and if this could predict a recession. Enjoy! Add me on Instagram: GPStephan

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Ok, lets start here: what is the yield curve
The yield curve graphs the short term bond returns with long term bond returns.

And generally speaking, the longer lend your money, the HIGHER the return you should have. This is because, long term, you might not know where the markets are heading, you aren’t sure of inflation, and there’s more to go wrong, in a sense. So because of that, you should be compensated a little more for the LONGER you invest.

However, right now, things are quite the opposite: you can get a higher return investing your money in short term bonds for just 3 months…than you can investing your money in long term bonds for 10 years. That is what’s meant by the yield curve INVERTING.

All you need to know is that when this happens, it’s used as an indicator that a recession is soon to come. This is because an inverted yield curve has correctly signaled nine recessions since 1955, with only one false positive in the 1960’s.

Economic Forecasts with the Yield Curve

Now…looking back all the way back to the 1960’s, when the 3 month / 10 year yield inverts for more than 10 days, it took an AVERAGE of 311 days from there to actually enter a recession. And once in a recession, it lasted – on average – of 17.5 months.

So here’s what this means, and what you should do about it.

Yes, this has predicted the last 9 recessions with one false positive…but this doesn’t ALWAYS mean it will be the case with 100% certainty, and if it IS right, we still don’t know how the market will behave and where the market will end its highs and lows. A recession could happen now, or it could happen in a year from now – the markets could go up another 15% before they decline, or they can go down 10% tomorrow….no one can predict it.

Most of this data we get is seen AFTER it’s already happened, so we can’t be completely sure what will happen in the near future to act on it with reasonable accuracy.

This leads me to my own thoughts and my own advice…and this is how I basically run my entire life:
Focus on the things you can directly control, and ignore the things you can’t.

By focusing on what you CAN control, and disregarding everything you can’t…you give yourself MUCH greater power to make the most of opportunities, LONG TERM, without concerning yourself about what the markets may or may not do in the short term.

If the markets go down – fine, that’s just part of the market cycle. Use that as an opportunity to continue buying at lower prices, knowing that long term, you’ll be ok.

If the markets continue going up – fine, that means your current investments are also going up in price.

It’s great to be aware of economics and what drives business, but at the end of the day, focus on what you can control and make sure you’re not in a position where you’ll be hurt if prices fall, so you can ride it out until it recovers.

And understand that even IN a recession, even WHEN prices drop – because they will at some point – that those are often the best opportunities to take advantage of. It should be something to embrace, not something to fear.

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