When math meets psychology, we get signals that could mean something or could mean nothing. Historically, when the yield curve inverts, a recession is looming. In layman's terms, the yield curve plots how much can be earned by investing in U.S. treasuries.

As an example, you'd expect that if you're investing in a 10-year treasury bond, you'd earn more than investing in a 2-year treasury bond. After all, you're putting your money away for a longer period of time and should be compensated accordingly, right? But when investors are concerned about the economy, a funny thing happens. They start piling money into long-term bonds for safety. As the demand for long-term bonds increases, so does the price, causing the expected return (yield) to come down. And that's exactly what's happening now. For a brief time, we saw that the 10-year treasury yielded less than a 2-year treasury. Here's the scary part: this inversion has accurately predicted every recession of the last 50 years.

But like I said, when math meets psychology something could mean nothing. The U.S. economy is stronger than it's ever been and is showing no signs of slowing down. Human psychology is a difficult thing to predict, and it's hard to say whether this historically accurate indicator still holds water in a market driven by outrageous headlines and nonsensical worries. So don't let the headlines scare you. Even if we do experience a recession, it's all part of the same old business cycle we've experienced over the past several decades. Nothing new under the sun.
5mo ago
4 Comments
BlueFish
Explorer
@Unstoked Great explanation! I don’t remember much from economics class, but this brought back some memories. Hopefully Trump resolves this trade thing with China and we can avoid a recession!
5mo ago

Algernon
One small thought
@Unstoked No using the r-word! I still have a bad taste in my mouth from the last recession.
5mo ago

MamaHollie
I’m a mom
@Unstoked Thank you for making something so scary and difficult to understand, so easy. May not be an easy time but at least I have a better understanding, thank you.
5mo ago

JordanWords
Truth Seeker
@Unstoked The sooner we rid ourselves of this joke of a President, the sooner we can avert economic disaster. I don’t like having my financial future dependent on whether Trump decides to use Twitter today
5mo ago

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