1 of the Stock Market's Most Reliable Recession Warnings Just Disappeared. Here's What Usually Happens Next.
The yield curve has uninverted. That doesn't mean we're out of the woods yet.
The 10-year/3-month Treasury yield spread, a reliable recession indicator, has recently turned negative, suggesting a potential recession within six to 18 months. Historically, this inversion has led to recessions eight times over the past 60 years. However, in late 2022, this time saw no recession, despite the spread plummeting to nearly -200 basis points, the lowest reading in history.
Now, with the recession seemingly absent, the signal has seemingly vanished. The spread's inversion can occur due to rising inflation expectations, increased government bond supply, and stronger economic growth. Currently, the U.S. inflation rate is between 3% and 4%, causing long-term yields to climb while short-term yields remain relatively stable.
Although economic growth is decelerating, strong corporate earnings and positive GDP growth counterbalance the impact. Despite this, there's no evidence indicating a recession or market correction is imminent. Long-term investments in the Vanguard S&P 500 ETF, the Vanguard Total Stock Market ETF, and similar funds are still recommended.
Inflation and government debt pose risks, but oil prices may peak, potentially reversing inflation and ending the Iran war. If the Fed avoids prolonged rate hikes, stocks should remain resilient.
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