There Absolutely, Positively Will Be A Recession

The stock market panicked today and as of this writing at lunchtime, the Dow was off 431 points. Why? Apparently, somebody decided that the 10-year Treasury yield dropping below the 3-month yield was a really big deal. All of a sudden, the nabobs emerged from under their rocks to tell us that a recession is coming.

I am not saying there is no chance of recession. We already knew that some of the economic reports of late were weaker. And Europe is still a mess, which kicked off the opening stock market losses here today.

But the 10-year rate, at 2.44, dipping below the 3-month rate, at 2.46, apparently was the tipping point.

For real? This is what throws the economy into the crapper? Excuse my French.

(Click on image to enlarge)

Source: Stockcharts.com

Look at this picture of the yield curve from yesterday. There already was a dip in the 5-year rate and that’s been in place the entire month of March. No recession there, right?

I thought that the entire yield curve needed to be flat to inverted to mean something substantial. After all, an imbalance in supply and demand on anyone maturity could distort the curve at that point so it makes sense to look at the whole thing.

Yes, I know we like short cuts and that’s why we look at the 10-2 spread (10-year yield minus the 2-year yield) to represent the entire curve. Certainly, there is no inversion there right now.

To be fair, the yield curve really flattened out in the middle of last year, as short rates climbed. No recession talk then. So why, then, does a 2 basis-point net move suddenly mean something after many months of relative flatness?

Again, the message is not that recession is impossible but focusing on one data spread, especially one that seems a bit too convenient for headline-seeking media, cannot be the bell that rings, telling us to run and hide.

Take in all the data. Don’t trade based on a single event, especially an obscure one that seeks to be a proxy for a signal that inherently comes with a multi-month time lag.