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The last 7 recessions were preceded by an inverted yield curve\u2026and we\u2019re close to one.


Is the Yield Curve Flashing Recession?
The yield curve is often considered one of the best leading indicators for the U.S. economy, which also makes it an insightful leading indicator for U.S. and global stocks.

It makes sense why the yield curve matters so much. Banks borrow money and pay deposits at rates on the short end of the yield curve (short-term interest rates), and then they in turn loan money to consumers, homeowners, and businesses at the long end of the curve (longer-term interest rates).

So, what happens when short-term interest rates are higher than long-term interest rates, i.e. when the yield curve inverts? The answer is that net interest margins get squeezed, profits fall, and a bank\u2019s incentive to lend money falls. As banks loan less, economic activity tends to follow.

This explanation, of course, is a very distilled version of how the yield curve affects economic activity. But I believe it\u2019s a useful way to frame your thinking.

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The Key to Managing Volatility \u2013 Focus on the Fundamentals!

Do not let volatility and the potential of a recession force you to make hasty investment decisions; instead, keep your eye on critical economic indicators with our Stock Market Outlook Report.

This report will provide you with our forecasts along with additional factors to consider:

- Will 2019 stay bullish?
- Zacks global markets\u2019 outlook
- What sectors show the best opportunity?
- What industries within those sectors most merit your attention?
- Forecast for the S&P
- Small-cap vs. large-cap returns
- And much more...
If you have $500,000 or more to invest and want to learn more about these forecasts, click on the link below to get your free report today!

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IT'S FREE. Download the Just-Released March 2019 Stock Market Outlook 1

History gives us hard evidence of how the yield curve plays into economic cycles, and it underscores the crucial importance of watching the yield curve as an economic cycle develops and matures. If we define the yield curve as the 10-year U.S. Treasury minus the 3-month U.S. Treasury, we can see in the graphic below that an inverted yield curve (when the blue line dips below the solid black line) has preceded a recession (grey bars) like clockwork.2

The Yield Curve Has Been a Reliable Predictor of Economic Recessions

Source: Federal Reserve Bank of St. Louis3

In fact, if we go back even further in history, we find that since 1970 there have been seven recessions and all of them were preceded by an inverted yield curve. The time it takes for a recession to take hold once the yield curve inverts vary throughout history, but it generally hasn\u2019t taken very long \u2013 5 to 17 months.

Source: Vanguard4

Where Do We Stand Today? Is the Yield Curve Flashing Recession?

Looking back at the first chart above, readers can see that the yield curve has been steadily flattening (approaching the zero mark) over the last five or so years. The spread between the 10-year U.S. Treasury and the 3-month U.S. Treasury was about 300 basis points at the beginning of 2014, and the spread has since dropped to 30 basis points by the beginning of February 2019.5

We\u2019re still not quite to \u2018inversion\u2019 territory, though in my view, all signs point to the yield curve heading in that direction.

We at Zacks Investment Management expect the yield curve to continue flattening in 2019. The Federal Reserve has a key role in determining how quickly the yield curve could flatten, as they determine rates at the short end of the curve. Though recently the Fed has indicated a less hawkish approach to increasing rates, we would expect another rate increase or two in the offing perhaps later this year or early next.

Longer rates are a bit trickier to forecast, but I\u2019d expect that modest long-term inflation expectations should keep long rates pretty subdued, and range-bound. I don\u2019t really see a scenario where the 10-year U.S. Treasury goes much higher than 3% in 2019.

Taken together, the risk of an inverted yield curve in 2019 is high and rising, but not necessarily imminent. And even if it was, history suggests we\u2019d have some time before a recession took hold. In short, it\u2019s an indicator to watch perhaps more closely than any other, but it is not quite flashing recession.

Bottom Line for Investors

Our forecast for global, U.S. and U.S. corporate earnings growth has moderated since the beginning of the year but remains positive. Earnings outlooks have notably declined as the impact of the corporate tax cut fades and as the fate of global trade hinges on Brexit and a US-China trade deal. Even still, global economic activity from consumption to business spending to hiring remain primarily positive and point to continued late-cycle growth. If a yield curve inversion and accompanying recession are in the offing, I do not think 2019 will be the year they actually arrive.

So, instead of letting fears of a recession push you to make hasty investment decisions, I recommend staying focused on the long-term view, meaning focus on fundamentals instead of the daily price movements. To help you do this, I am offering all readers our
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Just-Released March 2019 Stock Market Outlook Report.

This Special Report is packed with newly revised predictions that can help you base your next investment move on hard data. For example, you'll discover Zacks\u2019 view on:

- Will 2019 stay bullish?
- Zacks global markets\u2019 outlook
- What sectors show the best opportunity?
- What industries within those sectors most merit your attention?
- Forecast for the S&P
- Small-cap vs. large-cap returns
- And much more...
If you have $500,000 or more to invest and want to learn more about these forecasts, click on the link below to get your free report today!

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FREE Download \u2013 Zacks' March 2019 Stock Market Outlook 6 >>
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Zacks Investment Management was born out of one of the country\u2019s largest providers of independent research, Zacks Investment Research. Our independent research capabilities from our parent company truly distinguish us from other wealth management firms - our strategies are derived from research and innovation, including the proprietary Zacks Rank stock selection model, earnings surprise and estimate revision factors. At Zacks Investment Management, we work with clients with $500,000 or more to invest, and we use this independent research, 35+ years of investment management experience, and tools we\u2019ve developed to design customized investment portfolios based on each client\u2019s individual needs. The end result is investment management that is research driven, results oriented and client
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Ready to get serious about pursuing your financial goals? Call 1-800-701-9830 today, or schedule a time with a Zacks Wealth Advisor.

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1 Zacks Investment Management reserves the right to amend the terms or rescind the free Stock Market Outlook offer at any time and for any reason at its discretion.

2
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3 Federal Reserve Bank of St. Louis, 10-Year Treasury Constant Maturity Minus 3-Month Treasury Constant Maturity [T10Y3M], retrieved from FRED, Federal Reserve Bank of St. Louis; https://cl.S7.exct.net/?qs=07ccf61f4f10ee76c628f3792aca2760da4178e3cbb209262a5a6f9771be12e2da2d2eebf47eb26d523c4711bee7bdfdd66c4cac204e2756 February 20, 2019.

4
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This table was created from data here

5
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U.S. Department of The Treasury, February 19, 2019

6 Zacks Investment Management reserves the right to amend the terms or rescind the free Stock Market Outlook offer at any time and for any reason at its discretion.

DISCLOSURE

Past performance is no guarantee of future results. Inherent in any investment is the potential for loss.

Zacks Investment Management, Inc. is a wholly-owned subsidiary of Zacks Investment Research. Zacks Investment Management is an independent Registered Investment Advisory firm and acts as an investment manager for individuals and institutions. Zacks Investment Research is a provider of earnings data and other financial data to institutions and to individuals.

This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. Do not act or rely upon the information and advice given in this publication without seeking the services of competent and professional legal, tax, or accounting counsel. Publication and distribution of this article is not intended to create, and the information contained herein does not constitute, an attorney-client relationship. No recommendation or advice is being given as to whether any investment or strategy is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All
information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole.

Any projections, targets, or estimates in this report are forward looking statements and are based on the firm\u2019s research, analysis, and assumptions. Due to rapidly changing market conditions and the complexity of investment decisions, supplemental information and other sources may be required to make informed investment decisions based on your individual investment objectives and suitability specifications. All expressions of opinions are subject to change without notice. Clients should seek financial advice regarding the appropriateness of investing in any security or investment strategy discussed in this presentation.

Certain economic and market information contained herein has been obtained from published sources prepared by other parties. Zacks Investment Management does not assume any responsibility for the accuracy or completeness of such information. Further, no third party has assumed responsibility for independently verifying the information contained herein and accordingly no such persons make any representations with respect to the accuracy, completeness or reasonableness of the information provided herein. Unless otherwise indicated, market analysis and conclusions are based upon opinions or assumptions that Zacks Investment Management considers to be reasonable. Any investment inherently involves a high degree of risk, beyond any specific risks discussed herein.

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