The dreaded “R” word was a hot topic last week: Recession.

The reason wasn’t because of inflation, the war between Russia and Ukraine, or a new variant of Covid. Instead, it was a metric in the bond universe that quickly gained awareness in the mainstream media and with individual investors…

I’m talking about the yield curve — or rather in this case, an inverted yield curve — that’s alerting us to the possibility of a looming recession.

So I thought I’d spend some time today talking about what the yield curve is, what actually happened with the yield curve, and what it might mean for the market — and our own portfolios…

The Yield Curve, Explained…

Now before we gather our gold, bitcoin, butter, and bullets and head for the hills, it’s important to remember that this isn’t any reason to panic. But it is important to break this down to see what this really means and why we should care.

First, let’s talk about what the yield curve is, before we dive into the inversion part…

Now, when most individual investors talk about “yield,” they are thinking in terms of the equities market. But in this case, we will be talking about the bond market. In this case, when we talk about yield, we are referring to the interest rate at which bonds are being issued. And specifically, this discussion about the yield curve refers to the yields on notes and bonds issued by the U.S. Treasury — i.e. the effective rate at which the U.S. government borrows money.

The yield curve is just a fancy term for a chart that plots the yield for different maturities. The main ones are the two-year, 10-year, and 30-year maturities.

As you know, we like charts, as they help us visualize things. So, investors and economists track the various yields to help keep tabs on the economy and make sure everything is running as it should be.

The spread between short-term and longer-term rates is crucial. It is a predictor (and a good one) of the economic situation.

When things in the economy are firing on all cylinders, the yield curve is “normal,” or upward trending. This means that yields on shorter-term Treasuries (i.e. two-year) are lower than on longer-term Treasuries (i.e. 10-year).

This makes sense. After all, if you loan someone money, the longer you hold the loan the riskier it is. If you loan someone money on a 10-year term, there’s a higher chance they could screw up and not repay you.

Bottom line: an upward trending yield curve indicates a healthy economy. But that’s not what we’re seeing right now. Below is a chart of the yield curve as of last Friday…

_{Source: Treasury.gov}

What The “Inversion” Means…

An inverted yield curve means that short-term rates are higher than long-term rates. In other words, lenders are charging lower for a 10-year loan, than for a two-year loan. Why? Because all of a sudden, they think you’re more likely to hit some road bumps (read recession) in the near term, and more likely to repay later in the future.

The yield curve has inverted seven times since 1976. The previous time this happened was in late 2019, and I wrote about it in this article. We all know what happened roughly six months later… the Covid-19 pandemic swept the globe, sending markets into a tailspin. And yes, each time it inverted a recession followed. In the chart below, you can see each time this happened (gray bars indicate recession):

But here’s the important thing I want you to keep in mind with all of this talk surrounding the yield curve…

Sure, the yield curve has been a phenomenal leading indicator of recessions over the last few decades. But this doesn’t mean one is right around the corner. In fact, the average time between the first time the yield curve inversion and a recession is 16 months.

Keep in mind that an inversion of the yield curve does not cause a recession. It’s simply an indication that financial conditions have deteriorated, which carries serious implications for the U.S. economy. And the economy is not the stock market. Historically, the stock market peaks before a recession begins.

Bottom line, we shouldn’t ignore this red flag. But I don’t think it’s time to buckle down and start selling stocks just yet, either. We have time. And while markets may still be a little jittery, there are still plenty of stocks showing strength, and there will be plenty of opportunities to profit…

In the meantime, I just released a special presentation about Elon Musk’s latest project, and how it could unlock a new revolution in connectivity and disrupt the $2.5 trillion telecom industry…

By now, you’ve probably heard about Starlink and its breakthrough new “Low Earth Orbit” satellites that will bring hyper-fast internet to millions. And while Starlink isn’t tradable (yet), I’ve found a “secret partner” that’s absolutely crucial to getting the project off the ground.

Get the details on how to profit right here.