💰 5 Fact Friday: The Yield Curve's Recession Warning

ECONOMY
1. The Yield Curve's Recession Warning ⚠️

After a record-breaking 26 months, the longest inverted yield curve in history recently flipped back to normal. Let’s break down what this means.

The yield curve tracks interest rates on bonds of varying maturities—like the 1-year, 2-year, 5-year, and 10-year Treasury yields.

Under normal circumstances, long-term bonds carry higher yields because investors demand a premium for locking their money away for longer periods.

But when short-term bond yields exceed long-term yields, we get an inverted yield curve—often a warning sign that investors expect economic trouble ahead.

This inversion occurs when investors pile into long-term bonds. All of the demand pushes bond prices up and their returns (yields) down.

Lately, the curve has begun to normalize. As the Fed has teased rate cuts over the past few months, the 10-year yield has periodically surpassed the 2-year yield, marking the end of the inversion.

So, does this mean we’re in the clear?

Not quite. Recessions often follow un-inversions. In 2007, for example, a recession hit 10 months after the curve un-inverted. The same thing happened in 2001, 1989, and several other instances.

But don’t hit the panic button just yet.

This economic cycle has been anything but typical. Despite multiple recession warnings, GDP growth remains strong and signs point to a soft landing.

And remember, while recessions can be tough, they also present buying opportunities. If you're concerned about your portfolio, it might be a good time to rethink any risky holdings and free up cash—like Warren Buffett.

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COMMODITIES
2. Oil Prices Sink To Two-Year Low 📉

Crude oil has plunged more than 20% since April and over 40% since its June 2022 peak. Earlier this week, prices briefly dropped below $70 per barrel—their lowest point in two years.

A Crude Awakening

The recent price drop boils down to two major factors:

1. High Supply: U.S. oil production has surged to a record-breaking 13.4 million barrels per day. Libya is also ramping up output, adding more fuel to the supply glut.

2. Weak Demand: China, the world’s largest oil importer, is experiencing a sharp economic slowdown. Their demand growth has fallen off a cliff—280,000 fewer barrels per day in recent months.

Riding High Or Running On Empty?

This drop in oil prices is creating both winners and losers across the economy.

The Winners

• Consumers: Gas prices are already dropping, with an average of $3.24 per gallon nationwide. In 13 states, prices are under $3, and experts predict up to 25 more states could join that club soon.

• Travel & Manufacturing: Lower fuel costs mean reduced operational expenses, which translates to higher profit margins.

• Politicians: Historically, lower gas prices favor incumbents in election cycles, making this a timely boon for those seeking re-election.

The Losers

• Energy Companies: Lower oil prices slash profits, limiting investment in exploration and development. This often leads to layoffs in oil-heavy regions, dealing a blow to local economies.

• Banks & Investors: With less cash flowing through energy companies, those financing oil projects may see higher default risks on loans.

The Takeaway

For most consumers, falling oil prices are a welcome relief. More money in your wallet, less inflation pressure, and lower costs for businesses. But for energy producers and oil-heavy regions? Not so much.

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CRYPTO
3. Crypto Can’t Buy A Mention 🤐

Crypto companies have poured $119 million into election donations—nearly half of all corporate election spending. Yet, in the most recent presidential debate? Crickets. Not a single mention of Bitcoin, Ethereum, or digital assets.

Meanwhile, crypto prices are taking a hit. Bitcoin is down 20% from its March highs, and Ethereum has shed 50% since its November 2021 peak. Is the hype fading?

Not so fast. This might just be a normal part of the market cycle. Let’s break it down:

Halfway to Halving Gains

Historically, crypto peaks 12-18 months after a Bitcoin Halving. We’re less than six months into this cycle, so calling it quits might be premature. As supply tightens, expect prices to rise—assuming demand holds steady.

Feeling the QT Squeeze

Remember 2021’s crypto boom? That surge was driven by extra liquidity in the market. But with the Fed engaged in quantitative tightening (QT) and rates sitting at 5%, there’s been a real opportunity cost to holding crypto.

Rate Cuts to the Rescue

The good news? Rate cuts might be around the corner, possibly as soon as next Wednesday. As the Fed eases financial conditions, cash will likely flow from CDs and high-yield savings into riskier assets like crypto.

So, while crypto is down, it’s far from out. Keep an eye on the next FOMC meeting—Jerome Powell might just deliver the spark crypto needs.

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STOCKS
4. Are Dollar Stores Done For? 🔚

Dollar stores are facing a reckoning. Here are the key issues:

• Store Closures: 99 Cents Only shuttered all 371 of its stores in April, while Dollar Tree has plans to close 1,000 locations this year.

• Increased Theft: Dollar General is removing self-checkout lanes to combat rising theft.

• Cratering Stock Prices: Dollar General is down 21% in 2024, Dollar Tree has plunged 52%, and Five Below has dropped 57%.

What’s causing these challenges? Inflation has squeezed their core customers—households earning under $35,000.

These customers are more focused than ever on low-margin essentials, cutting back on discretionary purchases. At the same time, grocery inflation, up 25% since 2019, challenges dollar stores that rely on tight pricing.

Fierce competition isn’t helping either.

Walmart, up 48% this year, has rolled back prices on over 7,000 items, while Target has reduced prices on 5,000. This has drawn low-income shoppers away from dollar stores, threatening their business model.

The Bull Case 📈

These stocks are cheap. Dollar Tree, for example, trades at 9.5x its forward earnings—its lowest valuation in a decade. If inflation eases, basket sizes could increase, driving profitability and improving margins.

The Bear Case 📉

Walmart’s scale and pricing power give it a massive advantage. With its ability to compete on price and attract a wider income demographic, dollar stores could continue to lose market share, even as inflation cools.

MANIAC PICKS

Pet insurance can help in emergencies—but at what price? Find out if you’re better off self-insuring or opting for a policy.

Inflation slowed to its lowest rate since February 2021, but stubborn housing costs remain a challenge. Could this impact the Fed’s next move?

ETFs have surged in popularity since the pandemic, offering low costs and intraday liquidity. Learn why they’re a go-to for investors in uncertain markets.

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STOCKS
5. Guess That Stock 🧐

Last week, we tested your market knowledge with some clues about a company riding the AI wave and seeing huge growth in server and networking sales. If you guessed Dell, congratulations—you nailed it!

Ready for another challenge? Here’s your next set of clues:

1. This company recently secured a spot in the S&P 500.

2. The company’s name comes from the "seeing stones" in J.R.R. Tolkien’s Lord of the Rings, used for communication and seeing events in other parts of the world.

3. This firm specializes in AI and data analytics, helping governments and businesses turn vast amounts of data into actionable decisions. Its customer base has surged, with 295 commercial clients in the latest quarter, up from just 14 four years ago.

4. The stock has more than doubled in 2024 but now trades at 70 times future earnings.

5. U.S. government revenue still tops its commercial sales at $278 million versus $159 million, but the commercial side is growing faster—55% compared to 24% for government contracts.

Got a guess? Tap here to reveal the answer → 

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