It depends upon whom you ask.
Fortune’s Lucinda Shen asked the “godfather of yield inversion,” Campbell Harvey, a professor of finance at the Fuqua School of Business at Duke University who discovered the correlation between an inverted yield curve and a subsequent downturn, and Harvey said, “I have gone on record to issue a ‘recession code red.’”
Harvey stands by the predictive power of a yield curve inversion. Except for one “bright spot” in late July of this year, yield curve inversions that have sustained themselves over a quarter or longer in a year-long time cycle have been predictive of a downturn “almost perfectly.”
Harvey used two illustrative examples:
- 1 5-year to 3-month inverted curve since February 2019
- 1 10-year to 2-year inverted curve turned red in August 2019
Unlike lagging or past tense indicators such as the GDP, unemployment rates and the stock market, yield curve inversions are present tense.
Harvey also points to the most recent Chief Financial Officer survey conducted by Duke University to support his contention that yield curve inversions are predictive of economic downturns. This Chief Financial Officer survey indicated that 67% of all chief financial officers or CFOs expect a recession to come into being in late 2020.
The finance professor leans towards this survey because it indicates how key decision makers plan to spend their company’s money in the future. Based upon the uncertainty of the trade war and overall global slowdown, survey responding CFOs intend to hold on to respective company financial assets.
Fortune’s Lucinda Shen also referred to Janet Yellen, the former head of the Federal Reserve, concerning her thoughts of a potential recession. Yellen told Fox Business, “There is a quantitative easing in which the Federal Reserve acquired government bonds in order to inject liquidity into the market” and that this quantitative easing “had shifted the balance of the yield curve and made its signal less reliable.”
Whatever your thoughts concerning the predictive power of a yield curve inversion and a possible economic downturn, it’s best to pay attention to all economic indicators AND begin implementing your most strategic plans and actions to maximize your real estate business opportunities in ANY market.
Thanks to Lucinda Shen and Fortune Magazine.