Can the Yield Curve Still Warn Us of a Recession?

May 2024

Historically, an inverted yield curve, where short-term Treasury yields surpass long-term yields, has signaled an impending recession with remarkable accuracy. However, this time, despite the yield curve being inverted for a record length of time, the U.S. economy is showing no major signs of a slowdown. With steady job growth (employers added 175,000 jobs last month) and expected economic upticks, the reliability of the yield curve as a predictor is being questioned.

The pandemic's economic disruptions have challenged long-standing market assumptions, leading investors to reassess the curve's current implications. The role of the inverted yield curve as a recession predictor has evolved over time. Initially highlighted in the 1980s, it gained mainstream attention post-2008 financial crisis as a key warning sign. 

Past inversions have been influenced by varying circumstances, from aggressive interest rate hikes to external shocks like oil price jumps and the pandemic. Currently, despite last year’s expectations of a recession driven by high inflation and aggressive rate hikes, the economy remains resilient, with falling inflation and robust market performance (the S&P 500 gained 24% in 2022). This situation has prompted some market observers, including myself, to reconsider its reliability in forecasting recessions.

As your investment advisor, I monitoring these developments and their potential impact on your investments. While the inverted yield curve has been a reliable indicator in the past, the current economic landscape suggests that it may not be as predictive as it once was.