The yield curve that we have talked about for many months finally invested this morning, with the 2-Year Treasury Note paying a higher yield than the 10-Year Treasury Note. This is one of the strongest forecasters of a pending recession and could spell trouble for the stock market which clearly has not been pricing in a recession into stock values. This hit the markets hard this morning, with stock prices once again falling sharply on the news. Although an invested yield curve doesn’t start a recession, it is a clear symptom of something wrong in the economy. Keep in mind that this is just one sign of what is to come. There are other strong compelling arguments that point to what I believe is an imminent downturn in the US economy.
One reason that many Americans do not believe we will be in a recession is that job growth, the stock market and overall economic conditions here in the US have felt good. The first thing I will point out is that most every recession immediately follows a period of almost illogical strength in the economy. Just look back at what the Fed and most economists believed back in 2005 and 2006. Remember then Fed Chairman Alan Greenspan’s comment about, “Irrational Exuberance”? The stock market that he was referring to was nowhere near as irrational as the stock market we have experienced in recent years. Remember that history is the best predictor of the future. Learn the lessons and don’t repeat them.
As planned, bonds hit the bottom of their trading channel and are now moving higher. There is no need to immediately lock. We can now expect to see bonds move to the top of the channel before hitting resistance.