Wall Street is showing fear at 32 on the Fear and Greed index: Is a US recession getting closer and what should investors do?

US stocks have slipped from their highs this year, and investors have turned cautious. The Fear and Greed Index, which scores market mood from 0 to 100, now reads 32. That is in the “fear” zone. The S&P 500, Dow Jones Industrial Average and Nasdaq Composite are down about 2%, 3% and 5% from their peaks.

The bigger picture is less gloomy. The S&P 500 is up 11% so far this year and has more than doubled in the past four years. In the last month, it has been mostly flat. The nervousness comes from worries about heavy spending on artificial intelligence and high oil prices.

What does the yield curve say about a US recession?

The yield curve is one of the most closely watched recession signals. It “inverts” when long-term interest rates fall below short-term rates. An inversion has come before almost every US recession since the 1970s. Analysts mostly track the gap between the 10-year and 2-year Treasury yields.


The curve inverted in February 2000, and the dot-com bear market began a month later. It inverted again in 2006, and by late 2007 the US was sliding into the Great Recession. The last inversion came in 2022. The US did not officially enter a recession that year, but stocks fell into a bear market as inflation ran high and the Federal Reserve kept raising rates.

Right now, the curve is not inverted and has not been since 2024. It is sloping downward, though, and more rate hikes are possible. No indicator is perfect. None can tell you when a downturn will start, how long it will last or how deep it will go.

Three signs that worry market watchers

The first is the Buffett indicator, which divides the total value of the stock market by GDP. Warren Buffett has said a reading of 70% to 80% makes buying stocks likely to work well. Above 200%, he said, “you are playing with fire.” Before the 2000 crash, the reading crossed 200%. Today it stands at 301%.

The second is the CAPE ratio, developed by economist Robert Shiller. It divides the S&P 500’s level by its average inflation-adjusted earnings over 10 years. The long-term average is 17.8. The ratio has crossed 40 only twice; before the 2000 crash, when it touched an all-time high of 44, and now.

The third is interest rates. Inflation has not eased, and the Fed may raise rates again. Higher rates make borrowing costlier for companies, which can slow growth and cut earnings. They also leave people with less money to put into stocks. And as Treasury bills and corporate bonds pay more, safer options start to look better than risky shares.

None of this means a crash is certain. The Fed’s rate hikes may bring inflation down before any damage is done. And if companies keep growing, they can justify today’s high valuations.

For context, the 2000 crash cut the S&P 500 by almost half from peak to bottom, while the Nasdaq-100 lost 83%.

How should investors prepare for a downturn?

Recessions are a normal part of the market cycle, so timing the next one is less useful than being ready for it. The simplest step is to hold quality companies. Look for a lasting competitive edge and healthy finances. These are the traits that help a stock recover after a slump, while weak companies often do not.

History supports patience. The S&P 500 has gained more than 750% since January 2000, even after several major bear markets. Strong companies tend to recover given enough time.

If you have not reviewed your portfolio lately, this is a good time to do it. Check what you own, and ask whether those businesses can handle a rough patch.