History doesn't repeat itself, but it often rhymes.
Amongst many charts out there, there is one which has been rather accurate in indicating a potential recession heading our way.
The above graph represents the 10-Yr/2-Yr U.S. Treasury Yield. Whenever the difference turns positive sharply, a recession tends to follow (refer to the shaded regions in the graph).
This happens in all the past periods such as Covid-19, subprime mortgage crisis, dot-com bubble etc.
Most of the time, the difference between 10-Yr and 2-Yr U.S Treasury Yield tends to be positive as longer-term bonds should have a better yield than shorter-term bonds.
When the difference becomes negative, that's when yield curve inversion happens and it is during this period when the Federal reserve increases their interest rates which in turn directly controls/affects the 2-Yr U.S Treasury Yield.
In the recent period, you can see the difference being negative as the Federal Reserve has been keeping a high interest rate environment for the past 2-3 years.
When the Federal Reserve starts to reduce the interest rates, this is when the difference starts to become positive and the yield curve starts to come out of inversion. This might typically sound like good news but we have to bear in mind that this usually happens when the Federal Reserve senses that the economy is actually weakening and heading into a recession.
When we look at the past periods, the onset of recession might not happen immediately and could sometimes take a while after the difference between the 10-Yr and 2-Yr U.S. Treasury Yields turns positive sharply.
Another set of data that should be followed closely will be the U.S. jobless claims. During periods when the difference between 10-Yr/2-Yr U.S. Treasury Yield turns positive, the U.S. jobless claims also tend to be on the rise. Just two days ago, the U.S. weekly jobless claims unexpectedly rise.
The rise in jobless claims tend to also happen on the onset of recession.
Famous investors like Warren Buffett are hoarding cash like never before with a $325 million cash hoard reported. This further adds to concerns that there might already be undercurrents that retail investors like us might not be unaware of.
So, with this in mind, how will you invest in 2025?
Do you know that you will still do very well in the market over a long period even if you invest your money on the worst day of every year? Check this article out.
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