Game of Trades: I Was Wrong

History is being made. For over a year now, the yield curve on U.S. Treasurys has been inverted. That means that shorter-duration debt has a higher annualized yield than higher-duration debt.

Typically, the opposite is the case. Investors demand higher yields for holding debt for longer periods of time. When the yield curve is inverted, it signals an imminent recession. However, that has not played out this time.

Economic indicators show that the economy is expanding overall. However, the inverted yield curve shows that we should be contracting.

What’s different this time? The past four years have seen a shutdown of the economy over a pandemic, massive money printing, and soaring interest rates to tamp down inflation.

Meanwhile, corporate earnings have continued to grow. That’s helped push up stock market valuations overall.

Plus, jobless claims are still near historic lows. A rise in jobless claims would indicate a higher chance for an economic downturn.

Today, there seems to be no catalyst for a change in that current trend. However, many business cycle changes often appear to have no catalyst at first.

Meanwhile, the media has adopted the “soft landing” narrative. In the past, increases in the term soft landing have occurred well before more significant downturns.

For now, the markets are trending higher. But if that trend changes, investors may want to take some profits and get more cautious.

To view the full analysis, click here.