There are a handful of economic indicators that can give us a good idea of what’s really going on in the economy and where it might be headed. Based on past performance, an inverted yield curve has long been considered one of the most reliable of those indicators. Since 1955, 9 out of 10 recessions in the U.S. were preceded by an inverted yield curve, which is when long-term interest rates fall below short-term rates.
The most-watched yield curve, which plots the 10-year U.S. Treasury note against the 2-year Treasury, inverted in July 2022. At that time, many in the media cited it as evidence that the U.S. was about to enter a recession. But as time went on with no further indications of a pending recession, many wrote it off as an aberration and an “exception to the rule.” When it remained inverted for longer than any other previous inversion, others argued that yield curve inversions are no longer accurate predictors of recessions.
At the beginning of September of this year, after 26 months and with minimal media coverage, the longest inversion in history came to an end as the yield curve “un-inverted” and the 2-year Treasury yield fell back below the 10-year yield.
While closer examination reveals that our economy has rarely entered a recession while the yield curve was inverted, the near-term prognosis is considerably more alarming. In the past, when an inverted yield curve reversed and remained un-inverted, a recession typically followed within 3 to 6 months, as illustrated by the red segments and shaded areas of the graph below.
If the history of this indicator is a guide, the U.S. economy could enter a recession by the end of 2024 or early next year.
Rate cuts: bad news for markets
With the Federal Reserve beginning what appears to be a series of rate cuts for the foreseeable future, short-term rates are set to potentially fall further. Historically, as with inverted yield curves, Fed rate cuts have also been bad news for markets.
The table below shows that each of the last 9 rate-cutting cycles the Federal Reserve has initiated has been followed by a “correction” or bear market in stocks. The average decline of the S&P 500 index has been -20.5%.
A response to economic weakness
The Federal Reserve doesn’t cut rates because the economy is strong—it cuts rates when the economy is weak or weakening in an attempt to stimulate economic growth or slow economic decline. Today, the Fed is cutting rates to prevent weaknesses (especially in the labor market) from becoming even weaker. It’s part of the Federal Reserve’s efforts to maintain a delicate balancing act between a “soft landing” and a “hard landing” or economic crash.
Signs of potential trouble ahead
It’s important to note that inverted yield curves and interest rate cuts aren’t the cause of recessions or market corrections; they are instead important indicators of what’s going on in the economy. And currently, both are indicating there may be pain ahead.
Gold: an effective hedge against downturns and recessions
In times of economic uncertainty and instability, governments and individuals alike have sought the safety of physical gold, which has served as a form of wealth insurance and an effective hedge against market downturns and recessions. During volatile times, gold tends to surge, often outperforming riskier asset classes like stocks.
Gold: an effective hedge against downturns and recessions
In times of economic uncertainty and instability, governments and individuals alike have sought the safety of physical gold, which has served as a form of wealth insurance and an effective hedge against market downturns and recessions. During volatile times, gold tends to surge, often outperforming riskier asset classes like stocks.
As today’s uncertain economic environment continues driving demand for physical gold, there’s never been a better time to prepare for trouble ahead through the power of precious metals.
Don’t wait for the next market downturn—call U.S. Money Reserve today and learn how you can protect and grow your savings!
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Physical gold is a strong portfolio option because it holds intrinsic value, acts as a hedge against inflation, and provides stability during economic downturns. Gold’s timeless appeal as a store of wealth can help protect your assets and diversify your portfolio. Find out how easy it is to buy gold today and help safeguard your wealth against economic uncertainty.
