So, the big economic news last week was the “inverted yield curve.” This is when rates on long-term US treasury investments are lower than the short-term ones. Normally, the rates are higher for the longer-term. When it’s inverted, it usually means that investors are pessimistic about the economy in the short-term.
You’ll hear a lot in the news that the inverted yield curve has “accurately predicted the last 9 recessions since WWII.” They make it sound like a recession is guaranteed to happen in our very near future. But sometimes it’s 12-24 months until a recession hits, and some of the recessions have been so mild they are hardly noticed until they are over. Other countries around the world have had inverted yield curves in the past where a recession didn’t follow right away.
One point to keep in mind with predictions is whether an event is actually causing something to happen, or just a coincidence. Take the Super Bowl, for example. Every first Sunday in February, the city hosting the event will see a big increase in tourism. And then about 4 months later, the average temperature of that city rises noticeably for several months. The Super Bowl certainly caused the rise in tourism, but the arrival of Summer is just a coincidence.
But the stock market sure got spooked by the inverted yield curve, thinking the odds of a recession just went up. However, almost immediately the Trump administration announced they may back off on some of their planned tariffs on Chinese goods. I’m thinking they will do whatever they can to avoid a recession prior to the 2020 presidential election. On top of that, we may see mortgage rates drop again in response to all of the above. The bottom line is that no one knows for sure if we are about to experience a recession, or how strong or mild it will be.
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