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FLATTENING YIELD CURVE:
This occurs when SHORT TERM 2 YEAR BORROWING RATES INCREASE, while LONG TERM 10 YEAR RATES DECREASE…thereby signaling that investors see MORE risk investing in the short term than they do in the long term.
When this happens, it’s used as an indicator that economic growth is expected to slow down, and IF those yields invert – meaning, the 2 year bond pays more than the 10 year bond…it’s typically a warning sign of an upcoming recession. Even if we look back, in history…an inverted yield curve has correctly signaled nine recessions since 1955, with only one false positive in the 1960’s…where there was economic slowdown, but no official recession.
Although, in this case…even though Credit Suisse says we currently have a 25% chance of an upcoming recession…they explain that, since people have so much much money saved – more than usual is held within 10 year treasuries, thereby pushing yields down slightly more than usual…giving us a higher chance of a “false positive” recession signal…
USUALLY…when people refer to a “recession,” the first thing that comes to mind is a falling stock market, declining real estate values, high unemployment, and an overall “BAD economy” – but, TECHNICALLY, a recession occurs when we see “two consecutive quarters of economic decline, as reflected by GDP”…or, in more simple terms – that just means that our economy begins to shrink, as fewer goods and services are produced…HOWEVER…when it comes to the stock market…here’s what I found really surprising:
Since 1950…not every recession coincided with the stock market going down…according to them, “On average, the market declines 5.3% during an economic recession…. the worst drop totaled a loss of -36.4% and the stock market’s best gain totaled +16.6%.” On top of that, “We won’t know we are in a recession until we have been in for six months. Hence, predicting one is a fool’s errand,”
Although – it DOES SEEM as though – when you look throughout the last 70 YEARS…every recession, so far, has marked a great buying opportunity – where, within the following 3-5 years, prices are significantly higher than where they started. So, short term – IF a recession happens, prices tend to go down – BUT NOT ALWAYS – and, in the big picture – if stocks do DECLINE…they’ve always signaled the relative “low” of the market.
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