Many people see the stock market rise and fall and don’t quite understand what it means for them.
Wednesday, the Dow dropped 800 points, a reaction to a worrisome sign of the next recession.
“Sooner or later a recession will come,” says Maxim Dolinsky, assistant finance professor at Central Michigan University, “No one argues about that, it’s more of the timing.”
The threat of the next recession just became more of a reality as economists noticed one of the most accurate precursors of recession Wednesday.
“You saw inversion where the ten year rate dipped below the two year rate,” says Dolinsky.
It has to do with the treasury yield, which is essentially the interest rate the government pays to borrow money. Dolinsky says when the 10-year rates dip below 2-year rates, a recession has followed in the next 18 months.
“Every time before recession we see it become negative,” says Dolinsky.
The timetable may actually be sped up now, given we know what to look for.
“When you’re looking out for that, as soon as we see it nobody wants to be the last person to jump off the ship,” says Dolinsky, “So that’s why we saw 3% drop in the market yesterday.”
The Federal Reserve could reverse the inversion immediately by manipulating interest rates but that would be like a doctor attacking a symptom but ignoring the underlying disease.
“We can make things look more positive but it doesn’t resolve the problem itself,” says Dolinsky.
He believes this recession may be worse than 2008 and those nearing retirement age are the highest risk.
“In fact in 2008, the problem was that people thought they were about to retire and then they see their retirement accounts plummeted by 20% to 30%,” says Dolinsky.
The recession may be a year or so away but now would be the time to start asking questions and preparing for what’s coming.
“Ask your financial advisor what happens if tomorrow the interest rates go up 1%? Or 2%?” says Dolinsky, “If they cannot come up with an answer, then you may want to look for a new financial advisor but that’s something that many of us may not be looking at.”