The yield curve has been inverted for over a year, warning that a recession is ahead. While I don't have a crystal ball and can't predict the future, I believe we're heading for an economic downturn.
Below is a chart showing the difference between the yield on the 10-year Treasury Note and the 3-month Treasury Bill over the past 40 years. An inversion of the yield curve has been a reliable predictor of a coming recession. The yield curve is said to be inverted when the yield on shorter-duration Treasury bonds is greater than the yield on longer-duration Treasury bonds. The vertical gray bars indicate periods of recession. If we simply follow the line from left to right, the yield curve inverted then reversed and turned positive ahead of each recession. The inversion signaled a recession was coming; the normalization of the yield curve signaled that the recession was imminent. Yields across the curve have recently risen; the yield on longer-term bonds has risen more than yields on shorter-term bonds, causing the yield curve to begin steepening.
Below is a chart spanning from October 2004 to October 2009, highlighting three key data points. The blue line indicates the upper boundary of the Federal Funds rate. During this period, the Fed took steps to slow the economy by hiking interest rates, like actions taken over the last two years. The purple line measures the spread between the 10-year Treasury Note and the 3-month Treasury Bill, which became inverted as the Fed tightened monetary policy. This spread is currently inverted and has been for over a year. The orange line represents the S&P 500, which managed to climb despite rising interest rates and an inverted yield curve right up until the recession began—mirroring its behavior this year. Over the last 15 years, I've listened to stories from people who lost substantial amounts of their savings during the Global Financial Crisis. Warning signs were evident both then and now, yet in 2008, many found themselves blindsided. Had someone warned you in October 2007 about an impending recession, would you have listened? At the time, the economy and stock market seemed robust until they weren't.
Again, I don't have a crystal ball and can't predict the future, but the conditions that have preceded past recessions are present today, and it's prudent to heed their warning.
So, what should you do?
- Make sure you have a fully funded emergency account and consider increasing it. This should be cash in a bank or a credit union savings account.
- Review your discretionary expenses, like streaming subscriptions.
- Be mindful of where you're spending money. Consider eating out less.
- This may not be a good time to take on new debt, but it is an excellent time to consider reducing your debt if possible.
- You may want to consider reducing your investment risk.
Recessions are part of the economic cycle, with opportunities on the other side. Armed with these strategies, you're not just weathering the storm—you're setting yourself up for success when the economy improves.
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