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Inverted Yield Curve and the Recession



Inverted Yield Curve

The inverted yield curve (IER) is a general graph on a chart where the annualized return of fixed interest securities is plotted against their length of remaining to maturity. A high yield curve is usually upward sloping, indicating that the economy is working properly. So will the invested yield trend bring about another recession this time round?

As the yield curve shows, it shows that a stock’s earnings potential increases if it is trading on a higher market or better future outlook. The higher the returns and lower the risk, the better a stock’s future value becomes for the investor. Conversely, when a stock goes through a bear market, its value is decreased and becomes less attractive.

Investors should therefore be careful when choosing a company to put their money in. If the price is going down and a company’s future earning potential is not good, the stock might be in an uptrend. However, investors should exercise caution when dealing with the rising market as the rising prices and earnings potentials come at a cost. This cost might be too high for some investors who are seeking a quick buck, as the price of these stocks go up and the earnings potential does not justify the increased selling pressure.

Of course, the rising prices do not last forever and eventually, they will have an end. However, it will also mean that the market has no choice but to fall back to earth when the supply and demand forces take control once again.

The investor is not necessarily the one responsible for the drop. Usually, the falling market comes at a time when many people are looking for investment opportunities that offer a higher return on their investments. At such times, companies that are experiencing negative earnings might have a hard time maintaining their share prices. When they see no buyers for their stock, they go down in the market loses its momentum.

The rise and fall of a stock is determined by several factors including, but not limited to the company itself, the country that issued it, the country where the stock was issued and its financial standing. For instance, the US dollar may have dropped in value compared to the euro and UK pound while the UK Pound has fallen in value compared to the dollar because the UK voted to leave the European Union. In such cases, the price of the British currency might fall while the US dollar remains constant. Similarly, an oil-producing nation like Venezuela’s currency may have gone up while the oil prices remain steady, so oil-producing countries like Saudi Arabia, Iran, Kuwait and the UAE may suffer and the overall oil prices of the world could go up.