Even as the market experts have been talking about the US economy staring at a possible recession after its yield curve briefly inverted again with two-year Treasury yield topped 10-year yield in the past two weeks, Nobel-winning economist and Yale University professor Robert Shiller doesn’t feel convinced about it to be the real indicator for a likely slowdown. Instead, he said that public panic may be the actual indicator of the next downturn. Yield curve inversion, according to Investopedia, refers to an interest rate environment wherein long-term debt instruments have a lower yield than short-term debt instruments of the same credit quality and looked at as an indicator of the recession in an economy.
Shiller said that while the curve is a “well-known leading indicator,” but he is “not as confident in it as others are,” as told to CNBC Make It. In fact, Chiller called for analysts to mine data to look for any indicators that have stayed for some time. Importantly, the yield curve is assumed to be a strong signal of a recession ahead it can hold itself up whereas both inverted curves of the two-year to 10-year yield have been brief. Also, while the curve has preceded every recession since the 1950s, with only one false positive, the data set is quite small to be actually conclusive.
Nonetheless, the economist didn’t completely deny the expected downturn in the market particularly when you incorporate the public’s reaction to the inversions of late. A lot of what happens with the markets is a “self-fulfilling prophecy,” Shiller said, however, investors should not panic assuming a recession to begin tomorrow. There has been a 17-month lag on average between the inverted curve happening and the last five recessions, according to research from Ben Carlson of Ritholtz Wealth Management.
Experts believe that for young investors, the best strategy currently is to continue investing and making regular contributions to their retirement savings plan every two weeks. This is great for long-term investors because it keeps long-term investors from selling out during market lows and buying at the time of market highs.