Economy

A Wealth of Common Sense: The Predictive Power of the Yield Curve

With the yield curve inverting in recent weeks, investors should feel duly warned. This indicator has a stellar record of predicting a recession. But an economy doesn’t turn on a dime. It takes a long time for trends to play out.

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  • That’s why it’s possible the stock market could have a massive rally before a recession hits. That’s occurred several times in the past, including in 1999/2000 and 2008, and even in late 2019.

    In A Wealth of Common Sense, Ben Carson outlines past yield curve inversions, and what it’s meant for the economy and stocks in the months that follow.

    However, the past two recessions have seen a far more activist approach by the Federal Reserve and other central bankers.

    In short, rather than simply cut interest rates, these banks have intervened in credit markets. And they have been injecting trillions of dollars of liquidity into the financial system.

    That makes it likely we’ll see more market crashes like the one in March 2020, where a fast-acting Fed papered over the system so quickly that fastest start to a bear market also ended the soonest.

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  • Central bank intervention may also make yield curves less useful as an indicator as time goes on. If it takes more than 18 months from now for a recession to start, we may have a better idea if that’s true.

    To read the full blog post and view the corresponding charts, click here.