This Recession Indicator Has Issued a Clear Warning for Investors. Here's How to Prepare.

Nearly 61% of U.S. investors feel pessimistic about the market's future, the most recent weekly survey from the American Association of Individual Investors revealed. So if you're worried a recession is looming, you're not alone.

If one particular recession metric is any indicator, the next downturn may be coming sooner rather than later. Here's what the Federal Reserve predicts might happen in the next 12 months, plus a few simple steps you can take to prepare regardless of what happens.

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A warning sign that may not be as dire as it seems

One of the more popular recession predictors is the inverted yield curve, which signals that U.S. Treasury debt interest rates have fallen below short-term interest rates.

Historically, the inverted yield curve has been a reliable indicator that a recession will hit in the next 12 to 18 months. It can signal that investors expect an economic slowdown, and the Federal Reserve will often cut interest rates following a yield curve inversion.

Now, the inverted yield curve warning is flashing yet again, with the 10-year Treasury yield passing below the 3-month note. According to the most recent data released in February 2025, the New York Fed predicts there's a 23% chance of a recession in the next 12 months. With economic conditions changing quickly, though, that number is likely to shift in the coming weeks.

However, even when a recession seems imminent, it doesn't necessarily mean it will happen.

For example, in June 2023, forecasters at Deutsche Bank warned that there was a "near 100%" chance of a recession beginning by the end of the year. Chief economist David Folkerts-Landau even went so far as to warn that "avoiding a hard landing would be historically unprecedented." Yet, nearly two years later, we still have yet to face a recession.

The previous yield curve inversion, which began in 2022, also hasn't resulted in a recession, despite the odds. While inverted yield curves are rarely wrong, historically, they haven't been as accurate in recent years.

What should you do right now to prepare?

You may not be able to control when or if a recession occurs, but you can take steps to protect your finances. Regardless of what lies ahead, there are three simple moves you can make right now:

• Beef up your emergency fund: If the market falls during a recession, withdrawing your money might mean selling your stocks at steep losses. Having a stash of three to six months' worth of savings can help you avoid touching your investments if you face an unexpected expense.
• Double-check your portfolio: Healthy companies are more likely to pull through tough economic times. Businesses with strong financials, a competent leadership team, and a competitive advantage, for example, have a better chance of seeing long-term growth despite short-term volatility.
• Keep your focus on the future: Recessions are daunting, but even the worst slumps are only temporary -- with most lasting only a year or two. Try your best to avoid getting caught up in daily or weekly market fluctuations, and instead stay focused on the next five years, 10 years, or beyond.

One silver lining of economic downturns is that they can be fantastic investing opportunities. If you have cash to spare, now could be the time to start thinking about which companies you want to load up on if the market dips and stock prices are slashed. By preparing now, you'll be ready to jump on the opportunity whenever it may arise.

Nobody can say whether a recession will hit in 2025, but it doesn't hurt to prepare just in case. By taking small steps now to protect your savings and investments, you can rest easier knowing your finances are ready for anything.

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