A Recession (and bear market) Happens EVERY TIME the Fed Does This

Right now, the Federal Reserve is doing something that every single other time they've done this, it has led to both a recession and a bear market. So the question is, is this time different? If you're interested in economics at all, which I'm assuming you are because you're watching this video, you may pay some close attention to interest rates. Right now, the two-year yield is just over 3.5%, but the 10-year yield is at 4.2%, and it looks to be headed higher. Now, the 10-year yield is a little bit more important to most things that happen in the economy because it is considered the risk-free rate with a similar timeframe to most other forms of debt. For instance, a mortgage usually is a 30-year mortgage. However, most mortgages don't actually go for 30 years. You're gonna move, you're gonna refinance, and so most mortgages will last closer to 10 years. Same thing with auto loans. Now, we're starting to see something that hopefully looks like absolute insanity to most of you. We're starting to see popularity for a 144-month car loan. If you do the math, that is 12 years for a car loan. Similarly, things like business loans are also a lot closer to 10 years than something like 30 years or two years. So the 10-year is kind of considered the benchmark interest rate for the economy. Right now, it is headed higher. Although, if you look back at the last couple of years, it's currently at the exact same place it was back in October of 2022. However, when you look at short-term interest rates like the two-year yield, you see that back in October of 2022, it was actually a lot higher than it is now. In fact, it's been trending down. The difference between the two-year yield and the 10-year yield are what many people pay attention to when they're looking for signals of what's gonna happen in the future with the economy, and here's the reason why. This is what's considered a normal yield curve. If you're gonna borrow money for one month or three months, typically, you'll have to pay a much smaller interest rate on that loan than if you're gonna borrow money for 10, 20, or 30 years. So as you increase the maturity of the debt, the interest rate or the yield will also increase. On the other hand, this is what is called an inverted yield curve. In other words, when interest rates on short-term debt are actually higher than the interest rates or the yield on long-term debt. Now, if you've been following for the last couple of years, you know that we had an inverted yield curve for quite a while just a few years ago. This right here is a chart of specifically the two-year versus the 10-year. When the blue line is above the zero line here, that is called a normal yield curve. It's where the interest rate on the 10-year treasury is more than the interest rate on the two-year. But whenever the blue line crosses below zero, that means the yield curve is inverted, which means that the two-year has a higher interest rate than the 10-year. You can see that from about July of 2022 until about August of 2024, so for just over two years, this yield curve was inverted. Now, why does an inverted yield curve matter? Well, typically people say it matters because an inverted yield curve predicts recessions. In fact, if we go back all the way to 1900, the yield curve has inverted 28 times and recessions have followed 22 of those times, which again means anytime you see something like this, you expect a recession to follow. But that's actually not what we're talking about today because an inverted yield curve recently does not predict recessions in bear markets as accurately as the yield curve un-inverting and then steepening after the inversion, which means that the thing that we care most about today is this part of the yield curve after it dips negative and then it goes back to being a normal yield curve and the yield curve starts to steepen from there. If you're just looking at interest rates, that means the two-year yield will be lower than the 10-year yield. Relative to each other, the 10 will move higher than the two. Most of the time, the reason why the yield curve gets steeper is because the Fed is cutting interest rates at the short end. So if we look at this chart of short-term interest rates going back to the 80s, we can see that that would theoretically happen every time the Fed lowers interest rates. Now, we can overlay on top of that a recession indicator, so you see these gray bars show when there's a recession. And you can see there's a pretty high correlation between the Fed lowering short-term interest rates and a recession happening around that same time, except for right now. But again, it's not just about short-term interest rates going down. The reason why there's that correlation is because we also wanna see those long-term interest rates move up, which is why it's better to look at this chart, which shows the 10-year versus the two-year. And we can take this all the way back to, again, the 1980s. This chart also shows the gray bars, which have recessions, and we can see every time it dips below and then starts to move back higher, we have a recession. Back in 1980, again in 1981 and 82, we had an inversion and then a steepening leading to the 1990 recession. We had an inversion in 2000 and then a steepening leading to the 2001 recession. We had an inversion very briefly and then a steepening leading to the 2007 recession. Then we had a very, very brief inversion and then steepening leading to the 2020 recession, which just leaves now, in recent history, violating the long-term trend we have normally seen, where we get an inversion followed by a steepening, and we haven't yet seen a recession. Now, if you go back prior to 1980, you see a lot more correlation between just the inversion being followed by a recession. And many times, the recession happens while the inversion is still ongoing. It's only recently, within the past 40 years or so, where we see a much tighter correlation with the inversion followed by a steepening and then the recession happening after. But still, we didn't see the recession during the inversion, and we still haven't seen a recession now that it is uninverted and steepened. Or have we? This is a chart of US GDP growth by quarter, going back for 10 years. You can see, it obviously shows the brief recession we had in 2020, with two consecutive quarters of a declining GDP. Many of you remember, though, in 2022, they came out and said, you know what? We don't actually have a recession, even though we have two consecutive quarters of a decline in GDP. We're not gonna classify it as a recession because of jobs. But now, if you go back and look at the GDP data, quarter two of 2022 was revised upwards. So we do not have the classical definition of a recession met, even though we had one quarter of a decline in GDP. And that highlights something about recessions. And that is that there is no real definition of a recession, as long as you're talking about real, like defined by the laws of physics. We just make up definitions for whatever we are trying to measure. Historically, we've just decided arbitrarily that if there are two quarters where GDP falls, we're gonna say that's a recession. But that kind of binary definition doesn't really meet people in the real world in a way that matters to most. For instance, if you have four quarters of a very, very slight decline in GDP, that may not really be a big deal at all. However, if you have one quarter of a huge decline in GDP, that might matter a lot more. But both of those are technically a decline in GDP. And so if that's all you're using to say whether it's a recession or not, that doesn't really capture the financial struggle that regular everyday Americans might be going through. And so this inversion of the yield curve that started in June of 2022, while it may not have been met with the historical definition of a recession, it did still happen around the same time as GDP actually declined. And again, even though to date, we have not seen a recession since the yield curve uninverted and has been steepening, I don't know if you noticed this already, but we also got a decline in GDP in quarter one of 2025, which on the chart would be right here after the yield curve uninverted and would match up pretty perfectly with historical recessions, which are declines in GDP that lasted longer than a quarter. Now you might be thinking, well, just because there's a recession doesn't necessarily mean there's going to be a bear market. Let's say you are very secure in your ability to make income and keep your job, but you're thinking, ah, I'm not really sure about my 401k, is this time to sell? Well, do recessions have a good correlation with bear markets? Let's take a look. This is a chart of the S&P 500 that I have on the screen where every candle is one week, just in case you're wondering. Right now, we are looking back at about 10 years of the S&P 500, and you can see I have a line drawn here, which is in early 2025 when the stock market fell 20%. That is a bear market. Again, arbitrary definitions about what counts as a bear market or not. Historically, people usually say, hey, if it went down 20%, that's a bear market. So technically, we got a bear market in 2025, just a little under one year ago. We also got a bear market in 2022, and that one lasted longer, about 10 months. Now, if you notice, neither one of these has a gray bar highlighting a recession, whereas we do have a gray bar indicating a recession in 2020 during this bear market, but again, 2022 and 2025 both had declines in GDP. Both quarter one of 2022 and quarter one of 2025, even though it didn't last two quarters, we still saw GDP decline, and both of those were met with a bear market. Now, let's go back in time, start scrolling back to find earlier bear markets, and we see that the Great Financial Crisis also had a bear market that correlated with recession. We see that the dot-com bubble burst also had a bear market that was correlated with recession. We see in 1990, we had a bear market here that was correlated with recession. If that's too hard to see, let me zoom in there for you. There, it was a 20% drop. We also see it back in 1980 and 1981. We had a bear market that was correlated with a recession. Another one in early 1980. We see another bear market and recession happening in early 70s. Another bear market and recession happening in late 69. We also see a recession here in 1960 that was later followed by a bear market in 1962, and another bear market here in 1957 that was followed by a recession. So, we've gone back about 70 years here, and we can see a pretty high correlation between recessions and bear markets, which means that not only do yield curve inversions and then uninversions typically precede recessions, they also typically precede bear markets. But wait, if you're thinking, all right, that's all I needed. It's time to sell everything. Not so fast, because the timing here matters, and the timing here is almost impossible. Let's go back through history the other way, and we can see this bear market started before the recession, whereas this bear market started well after the recession. This bear market started well before the recession. This one started well before the recession. This one started at the same time as the recession. This one started before the recession. This bear market happened with no recession. This bear market started before the recession. This bear market started before the recession and continued well after the recession. The spare market started before the recession and ended before the recession ended. The spare market started before and ended during. The spare market happened with no recession. In other words, if you're trying to time this thing, it might be actually impossible because there is no way to tell what the lag time is between the yield curve un-inverting, when that will hit the economy, and when that will hit the stock market. The stock market is a forward-looking machine. It's a future-discounting machine. The odds or the certainty of something happening in the future get priced into the present. If I know the stock market's going to collapse by 10% in the next six months, I'm going to sell now. I'm not going to wait. And the more people who think that same thing will also sell now, which means that 10% drop that was going to happen in six months, it happens now. Again, we can't see the future, but everybody is trying to do their best job with investing, which means the higher the odds are something will happen in the future, the more likely that is to get priced into the present. But if you want me to rub salt into that wound just a little bit more, you still can't look at the market right now and think, well, we're at all-time highs. That's an indication that I should sell. And even if I don't nail the exact top here, I'm still probably going to be selling before a recession and a bear market, not so fast, because you're still thinking that because the yield curve inverted here and steepened and we haven't yet seen a bear market and recession that is destined to happen. But keep in mind, we did see GDP declining in 2022, and we did see the GDP declining in 2025, and we did see a stock market crash in 2022, and we did see a stock market crash in 2025. Remember, these definitions of bear markets and recessions are arbitrary limits that humans just decided we would commonly accept. And so based on those arbitrary guidelines of the boxes that we have just randomly decided, maybe we haven't technically had the recession and bear market from that yield curve inversion and then un-inversion. However, if you're a little bit more loose with your definitions and you think, okay, well, in general, yield curves inverting and un-inverting will have an impact on the economy. We've seen that impact. The economy shrank in 2022, the economy shrank in 2025, and the stock market reacted both times. So don't be so sure that we haven't yet seen something because you're blinding yourself to the fact that maybe it already happened and just happened a little bit differently than maybe you were expecting it to. And by the way, if you were thinking about selling just because the market hit all-time highs, take a look at this chart, which indicates your performance investing in the market by only buying on days where you hit a new high versus buying on any other day. And you can see that on timeframes varying from three months all the way to five years, generally investing on new highs gets you better performance, especially the longer term you're looking. And that's because something that continues to go up will most often be hitting new highs, especially when it's in an uptrend. And so if you are avoiding investing just because it's at an all-time high, you're going to be missing out on investing in the market during the best times to invest in the market unless, of course, this time is different. As always, thank you so much for watching. Have a great day.