Inverted Yield Curve looks to be forming ... ... what should we do?
Sometimes referred to as a negative yield curve, the inverted curve has proven in the past to be a relatively reliable lead indicator of a recession.
An inversion in these particular points has correctly predicted a recession with a lead time of between eight months and two years in each of the last eight recessions. The average time between the formation of the inverted yield curve and the subsequent recession averages out to be 16.2 months (between 1980 & 2019)
Banks traditionally make their money by borrowing short term (through deposits) at low rates, lending longer-term at higher rates. The banks would profit from the difference. But when the yield is inverted, the bank treats this as an alarm.
it’s taken as the bond market saying that this can go no further, and makes it hard for the Fed or any other central bank to proceed with a tightening.
While the news share conflicting views about how we should treat the inverted yield curve, let us "assume" that the worse is coming but remain hopeful that the market will recover eventually. Between greed and fear, understanding businesses & their fundamentals keep us as realists who take advantage of the price gaps found between despair & excitement.
For long term investing, this will be treated as part of the volatility of the general market where recessions are the best time to pick up great stocks at good discounts. Always set aside cash for "such" rainy days. But for now, life goes on. It could be months before something or if anything happens.
Time in the market is our greatest advantage |
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