The market has been up over the last week. And by market, I’m referring to two general stock-market indexes, the Dow Jones Industrial Average, commonly called “The Dow”, and the S&P 500 Index, a group of 500 large US companies that the folks at Standard & Poor feel represent the US economy. Bonds fell slightly due to lower interest rates across the globe.
The big question we hear is “when is the recession coming?” I don’t have a crystal ball, but we can look at a set of economic indicators to give us an idea of the health of the US economy.
Overall, our recession watch dashboard is showing a modest risk of recession within the next year. Of the five key factors we watch, only one is yellow, or “on watch”. The Treasure Yield Curve, or the interest rate difference between the 10-year treasury note and the three-month T-bill is “on watch”, meaning we’re seeing numbers that could indicate a recession in the near future. Leading economic indicators, market breadth, purchasing manager’s sentiment and market valuation are all in the “green”, indicating no imminent risk of recession. Of course, we cannot account for geopolitical events, acts of terrorism and so forth. But the economic data are still showing we have life left in the current economic expansion.
A further explanation of the yield curve might be useful. If you look at CD rates, you would expect that a short-term CD, say, 6 months, would pay less interest than a 5 year CD. The longer you give the bank your money, the higher the annual interest rate. If we graph out interest rates for government bonds (T-bills and treasury notes), we would expect the same thing. When that flips, meaning longer-term notes pay less than short term ones, that’s an inverted yield curve. The market is signaling that it expects lower interest rates in the future. The joke in economic circles is that inverted yield curves have predicted 50 of the last 10 recessions, meaning that, while most recessions are preceded by an inverted yield curve, an inverted yield curve does not always mean there will be a recession.
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