Here's why the market is ignoring a tell-tale sign that a recession is coming

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The apparently broken relationship may lie in what a peculiar time this has been for the financial and economic worlds.

For just shy of a year now, the bond market has been signaling that a recession is on the horizon. And for the better part of the past six months, the stock market has been ignoring it. In early July 2022 , the 2-year Treasury yield surpassed that of the benchmark 10-year note , a phenomenon known as an inversion that has preceded each of the six recessions the U.S. has experienced going back to 1980.

The inversion level is little changed since then, so the recession probability likely is about the same. However, other indicators are not as clearly pointing to recession. Most notably, the labor market has been uncannily strong, with a 3.7% unemployment rate despite the Fed raising benchmark interest rates 5 percentage points since March 2022. The services part of the economy remains strong, and even housing numbers of late are turning around.

 

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