The spread between the yield on the long-term Treasury bonds and short-term bills and notes is narrowing at a rapid clip, and cable pundits are calling for the apocalypse. After all, each of the last seven recessions was preceded by a flattening yield curve, so it just stands to reason that a recession is looming right over the horizon.
Given the speed of the narrowing, it must be time to sell everything, load up on canned green beans and bullets, and head for the bunker... Right?
Look - no one wants to see this market dive more than me; I firmly believe that fortunes are born in bad markets.
But let's be realistic here...[mmpazkzone name="in-story" network="9794" site="307044" id="137008" type="4"]
It's Tough to See All This Ending in Abrupt Recession
The economy may not be booming, but it is getting better. Housing starts are at the highest level in a decade. Builder confidence is high, the employment picture is improving, and the economy is generally grinding along. Unless the U.S. Federal Reserve screws up royally (always a possibility) and raises rates too fast in 2018, it's hard to see a recession developing.
Keep in mind that the curve is flattening with rates at historic lows. In 2007, the curve flattened with 10-year rates over 5%. In 1999, the yield was around 6%. Today, the 10-year yields just 2.37%. The hikes on the short end will not create the same economic drag as higher rates have in the past.
There are technical factors in play that didn't exist in years past. We have massive bond exchange-traded funds that are buying long bonds as the world blindly searches for yield. Central banks all over the world are still buying bonds to keep long rates down and stimulate their national economies.
This demand is keeping a strong bid in place for longer-term bonds and helping to flatten the curve. These two powerful demand sources didn't exist in the past, when the curve was flattening as a result of economic activity and not just massive bond buying.
Look, I know flattening curves have always worked to forecast recessions in the past. That's probably the best reason to think it is not going to work as recession predictor this time around.
Besides, if everybody knows that a flattening yield curve will predict a recession and market decline, then it is almost impossible for it to work this time.
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About the Author
Tim Melvin is an unlikely investment expert by any measure. Raised in the "projects" of Baltimore by a single mother, he never attended college and started out as a door-to-door vacuum salesman. But he knew the real money was in the stock market, so he set sights on investing - and by sheer force of determination, he eventually became a financial advisor to millionaires. Today, after 30 years of managing money for some of the wealthiest people in the world, he draws on his experience to help investors find "unreasonably good" bargain stocks, multiply profits, and build their nest eggs. Tim tirelessly works to find overlooked "hidden gems" in the stock market, drawing on the research of legendary investors like Benjamin Graham, Walter Schloss, and Marty Whitman. He has written and lectured extensively on the markets, with work appearing on Benzinga, Real Money, Daily Speculations, and more. He has published several books in the "Little Book of" Investment Series and a "Junior Chamber Course" geared towards young adults that teaches Graham's principles and techniques to a new generation of investors. Today, he serves as the Special Situations Strategist at Money Morning and the editor of Peak Yield Investor.