Save and Invest

Nobel-winning economist says forget yield curves— this may be what really fuels a recession

Robert Shiller, Yale University Professor of Economics, co-founder of Case-Shiller Index
Adam Jeffery | CNBC

You've probably heard a lot about the looming market recession over the past week. But at least one notable economist says public panic, rather than an inverted yield curve, may be the real indicator of the next market downturn.

Market watchers have been trumpeting the likelihood of a recession after the yield on the benchmark 10-year Treasury note briefly dipped below that of the 2-year U.S. note — which has happened for four days over a two-week period. Some experts consider this to be a fairly good indicator of recessions, but Robert Shiller, the Nobel-prize winning economist and Yale professor, says he's not convinced it will hold true this time around.

"It is a well-known leading indicator," acknowledges Shiller. "But I'm not as confident in it as others are," he tells CNBC Make It. Instead, he chalks it up to analysts "data-mining" to find any indicator that holds up. While the yield curve has preceded each of the seven recessions since the 1950s, with only one false positive, it's a fairly small data set to be really conclusive.

On Aug. 21, the yield on the benchmark 10-year Treasury note fell below that of the 2-year rate again.

It's also worth noting that generally an inverted yield curve is considered a strong indicator of an upcoming recession if it has some staying power. So far, both of the recent inversions of the 2-year to 10-year spread have been brief.

That said, Shiller isn't completely ruling out the possibility of a market downturn, especially when you factor in the public's reaction to these recent yield curve inversions. "There's a huge discussion of inverted yield curves. We saw that before in 1980, and there was a big recession then," he says.

A lot of what happens with the markets is a "self-fulfilling prophecy," Shiller adds. "I hear so much talk about a market correction, it might make it happen."

But that doesn't mean investors should panic thinking a recession will hit tomorrow. On average, there's been a 17-month lag between the inversion and the last five recessions, according to research from Ben Carlson of Ritholtz Wealth Management.

Worried? Here's what you can do right now

Before you rush to empty your 401(k) and stuff that money into a mattress, keep in mind that recessions aren't exactly bad news for millennials right now. That's because they typically don't have a lot invested in the market yet, so they won't take as big of a hit. Plus, if they can buy low now, they'll have decades to grow their investments before retirement.

In fact, experts say the best strategy right now, especially if you're a younger investor, is to keep investing and making regular contributions to your 401(k)s every two weeks. This routine influx of money into your investments is a strategy called dollar-cost averaging. It's great for long-term investors because takes the emotion out of the equation and keeps them from selling out during market lows and buying in at market highs.

"Investing should never be about a moment in time, it should always be about a process over time," Liz Ann Sonders, chief investment strategist at Charles Schwab, tells CNBC Make It.

What is a recession?
What is a recession?

Another step you should consider taking right now is rebalancing your portfolio, especially if the recent market swings have you stressed. Your investments can drift off their target allocation when the market shifts up and down, so selling some of your holdings and adding others to the mix can get you back in line with your risk tolerance and your financial goals.

A 401(k) is actually a good place to invest amid market volatility, Sonders says. Typically these are structured so that you're buying on a regimented basis and many have an automatic rebalancing process.

Last, take a deep breath. Many millennials have strong "muscle memory" from their own involvement, or their parents' experiences, with the market during the last financial crisis, Sonders says. Yet the reality is, that market event was not the rule, it was more on the exception end of the spectrum.

"There is such a thing as garden-variety corrective phases — they don't all look like the 2008 financial crisis," Sonders says.

Don't miss: Why a down market may actually represent an opportunity for investors

Like this story? Subscribe to CNBC Make It on YouTube!

Economist Robert Shiller: The Fed cutting rates can dampen market sentiment
Economist Robert Shiller: The Fed cutting rates can dampen market sentiment