By Robert Ross via Iris.xyz
August 14 was the worst day of the year for stocks.
The Dow Jones Industrial Average plunged 800 points in a single day.
The stock market plunged because of a serious economic warning sign called a yield curve inversion.
A yield curve inversion is a canary in the coal mine for the economy. It’s happened before every recession in the last 50 years.
However, there’s no reason to panic.
An inverted yield curve does not mean a recession is imminent. In fact, the last five times the yield curve inverted, stocks actually rose for the next 12–18 months.
Why This Inversion Spooked Investors So Much
When investors talk about the yield curve, they’re talking about the difference between long-term Treasury yields and short-term Treasury yields.
Normally, investors demand higher yields for longer-term bonds. So the yield curve normally slopes upward like this:
But sometimes, things aren’t so normal.
When one of the long-term Treasuries yields less than one of the short-term Treasuries, it’s called a yield curve inversion.
For example, that might mean the yield on 10-year Treasuries is less than the yield on 3-month Treasuries like it was back in March.
Or it might mean the yield on 10-year Treasuries is less than the yield on 2-year Treasuries.
That’s what happened on August 14: The 10-year yield was 1.59%, and the 2-year yield was 1.60%. So, the difference was –0.01%. (Whenever this number is negative, you’ve got a yield curve inversion.)
The last time this part of the yield curve inverted was in December 2005—two years before the financial crisis.
So it’s pretty rare. That’s why the August 14 inversion spooked investors so much and US stocks suffered their worst day of the year.
Read the full article at Iris.xyz.
