The Dow Jones industrial average fell more than 400 points when the market opened today when investors responded to major warning bells about a potential upcoming recession.
While it is still early, all signs seem to be pointing to another major recession. This comes just a day after the market saw its best performance in two months. This is not great news to come in a year that has already been tough for the stock market.
What Are These Warning Signs?
What investors are seeing that is sparking so much fear and concern is something called an “inverted yield curve”. If you’re not an economics major or you’re not sure what that means, don’t worry – here’s a quick rundown of it, as you will soon be hearing these words a lot.
An inverted yield curve is when you are getting more for short term investments than long term ones, which doesn’t seem to make sense. If you try to go into a bank and get a CD, 100% of the time you will see a better interest rate on a 10-year CD than a 6-month or 1-year CD.
The bank is paying you more for allowing them to hold your money longer, essentially.
The problem is that for the first time in a very long time, the U.S. Treasury is offering a better interest rate on short-term bonds than long term bonds. 2-year Treasury bonds are yielding 1.603%, while you only get a yield of 1.6% on 10-year Treasury bonds.
That .003% makes a very big difference, to both Uncle Sam and investors who use these numbers as indicators.
According to experts, the 3-month Treasury bond to the 10-year bond has been inverted for weeks. This change in the 2-year to 10-year is just another warning sign.
But Why Does This Point to Recession?
In the last 50 years, this event has preceded every single recession that the US has seen. Investors are taking it very seriously as a sign of bad things to come, economically speaking.
This isn’t an immediate reaction. If we are to see a recession and this is indeed the first indicator, it will be in about 18 to 24 months, if historical data holds true. That means that this holiday season won’t be affected, but next year retailers could suffer.
The US isn’t the only one struggling. Germany announced today that their economy has shrunk, blaming the US-China trade war and Brexit as the major components. China also has a weakening economy with huge unemployment rates.
What these signs mean on a global scale is too soon to tell. But it doesn’t appear to be good – or fake news.