Why Investors Should Take Note of the Inverted Yield Curve
Wednesday, November 1st, 2006
By Michael Lombardi, MBA for Profit Confidential
At the beginning of August, the U.S. yield curve became inverted. And, except for a week in September, the yield curve has been inverted ever since.
Simply, the yield curve is the ratio between what a U.S. 10-year Treasury Note pays and what a U.S. two-year Treasury Note pays. Since August, investors have been able to get a higher return from a two-year note than from a 10-year note.
Historically, periods of prolonged inverted yield curves have been followed by recessions. By definition, during a period of inverted yield curve, the market is saying it sees better business now and slower business down the road.
While I read a few articles on the inverted yield curve phenomena when it first happened in August, I’ve read or heard very little about it since and this is concerning to me. In an era where market information has become so readily available, I believe reporters and analysts have become more concerned with the last quarterly earnings… placing little emphasis on things that “aren’t happening.”
An inverted yield curve just sits there. When it first happens, investors take note. But, as the economy continues to chug along, investors forget about the inverted yield curve and come up with that favorite line, “it’s different this time.”
In my humble opinion, an inverted yield curve is dangerous to our economy because it signals a slowdown ahead. Depending on what report you believe, periods of inverted yield curves are followed by recessions 80% to 90% of the time. Given what I see in the economic environment that exits today, I see no reason why the future will be any different this time. Investors should take note of the inverted yield curve and its ramifications.
NEWSFLASH–Wal-Mart same store sales rose only half a percent in October, their smallest annual gain in about five years. Wal-Mart is the world’s biggest retailer and often viewed as an indicator of American buying patterns.
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Tags: economic analysis, Wal Mart
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Michael bought his first stock when he was 17 years old. He quickly saw $2,000 of savings from summer jobs turn into $1,000. Determined not to lose money again on a stock, Michael started researching the market intensely, reading every book he could find on the topic and taking every course he could afford. It didn’t take long for Michael to start making money with stocks, and that led Michael to launch a newsletter on the stock market. Today, Michael only employs the top market analysts and editors. Some of our recommendations have posted gains in excess of 500%! Michael has authored and published over one thousand articles on investment and money management. Along the way to building Lombardi Publishing Corporation, now with over one million customers in 141 countries, Michael became an active investor in real estate, art, precious metals and various businesses. Readers of the daily Profit Confidential e-letter are offered the benefit of the expertise Michael has gained in these sectors. Michael believes in successful stock picking as an important wealth accumulation tool. Married with two children, Michael received his Chartered Financial Planner designation from the Financial Planners Standards Council of Canada and his MBA from the Graduate Business School, Heriot-Watt University, Edinburgh, Scotland.Follow Michael and the latest from Profit Confidential on Twitter
