Mohammed Azharuddin Nasim’s Post

2. Yield curve inversion Smart investors know that successful investing is often a balance of risk and reward. Longer-term Treasury securities typically offer higher yields than shorter-term Treasuries in order to compensate investors for the increased risk they are taking. But sometimes, the yields on the short-term Treasuries (specifically the 2-year Treasury) surpass those of the long-term security (the 10-year Treasury). When this happens, the yield curve is said to invert. Duke University professor Campbell Harvey was the first to postulate that sustained yield curve inversion indicates an impending recession. This phenomenon typically happens during periods of rising inflation or other worrisome events, such as declining auto sales, wage growth, or other signs of an economy in distress. According to data from the St. Louis Federal Reserve, a recession could take place anywhere from six months to three years after a yield curve inverts:  In the above chart from the Federal Reserve Bank of St. Louis, the blue line illustrates yield curve inversion when it dips below 0 (in other words, times of trouble), while the gray bars indicate periods of recession. You can see how closely they correlate around the 1980 period, in particular, when the economy was mired in a three-year stagflationary funk. How does the current economy stack up? On July 5, 2022, the yield curve inverted again — and it has stayed that way ever since. Historically, that’s a sign of an impending recession, although the economy has gone 18 months without one already. The truth of the matter is, while every recession has been preceded by an inverted yield curve, yield curve inversions don’t always point to recession. In other words, the yield curve isn’t always a crystal ball. There has been one “false positive” reading of the yield curve, meaning an inversion took place, but a recession never occurred — that happened back in 1966. Do the times we’re in defy historical precedent? You be the judge. Where to find this information: You can find bond yield charts by visiting the Treasury Department’s website, which publishes them daily after the market closes. 3. Spikes in the Volatility Index (VIX) Everyone knows that periods of pronounced volatility go hand-in-hand with economic weakness, and the Chicago Board of Exchange’s Volatility Index, commonly known as the VIX, is one of the best indicators of market volatility. The VIX is calculated using market prices of S&P 500 put and call options. Basically, the higher the VIX reads, the more turbulent the trading environment — generally speaking, when the VIX rises, the S&P 500 drops. Here’s how to interpret its measurements: A VIX level above 20 is typically considered “high.” Anything below 12 is typically considered “low.” Readings between 12 and 20 is considered “normal.” As you can see, big volatility spikes go hand-in-hand with recession.