Is the U.S nearing a recession? That remains the key question on the minds of investors. One of the most closely watched predictors of a potential recession in the bond market, known as the inverted yield curve flashed red.
- An inverted yield curve means interest rates on short-term bonds are paying more than long-term bonds, usually a bad sign for the economy.
- Not every inversion was followed by a recession, the signal has been wrong on at least two instances*.
- For the last five recessions, S&P 500 stocks have posted average positive returns of 13.5% for the year following an inversion. Investors should be cautious and not consider an inversion a market timing tool. To better understand what all the chatter is about, let’s begin with the basics.