High gas prices, war in Ukraine, rising interest rates, inversion of the yield curve, investors have plenty to be worried about
High gas prices, war in Ukraine, rising interest rates, inversion of the yield curve, investors have plenty to be worried about
Investors are worried about a recession occuring in the U.S. Why, well I am glad you asked. The 2 year 10 year yield curve inverted, which many on Wall Street see as a warning sign. Yield curve inverts because investors are worried about the economy in the short-term, and not as worried on the long term. They selloff bonds that are shorter dated, and that raises the interest rates of the shorter dated bonds, and buy longer dated bonds which causes longer dated bonds yield to go down. As a result, the yield curve inverts.
A normal yield curve looks like a steepening line. The longer in time you go, the higher the interest rate will be. Investors demand a higher interest rate for a longer dated bond because their money is locked up for a longer period of time.
On Wednesday March 30, the U.S. 2-year and 10-year yield curve inverted. Though not every time when the yield curve inverts does that mean recession, all recessions came after an yield curve inversion, but not every time the yield curve inverted did a recession occur. A bit of good news is that after an inversion, the market typically rallied for about 6-12 months after the inversion, and recession didn't occur until about 6-12 months after the inversion, according to historical data.
Makes sense right now that investors are worried. The war in easter Europe, rising gas prices, and the Federal Reserve raising interest rates, investors have plenty to be worried about.
One indicator of a recession coming could be the sales of products such as lipsticks and of all things, mens underwear. Alen Greenspan, former U.S. Fed Chairman, is eyeing sales of mens underwear as a predictor of a recession coming.
As odd as this indicator could be, there was a noticeable decrease in sales of mens underwear between 2007 - 2009, but they gained steam in 2010 as the economy started to recover.
In 2001 Estee Lauder CEO created what he called the lipstick index. That is that data suggests an inverse correlation of lipstick sales and the economy. As the economy declined, they noticed that lipstick sales increase. Why, well it beats me too, but in the fall 2001 lipstick sales increased 11%, and during the great recession lipstick sales increased 25%.
Final thought: yes the yield curve inverted, but that does not 100% mean a recession is coming. I just wanted to point it out and for you to be on the lookout. A yield curve inversion is a signal. In summer of 2019 the yield curve inverted, and we had a recession in 2020. Though that would be a special case because you would have to know that a pandemic was looming about 6 months later, and that is something nobody had seen coming. In 2006 the yield curve inverted and in 2007 we were in a recession. Then the great recession due to the financial crisis was upon us. Yield curve inversion is a signal, but it is not a tell all sign.
