Brad here. Today, we have a detailed look at what an inverted yield curve might mean for bonds from one of our great investment analysts, Nicholas Follett. Enjoy!

The past week has been a tough one for stock investors. The S&P peaked on July 26, and it has dropped every day since then for a total decline of almost 6 percent (as of the close of August 3). This is a large and fast drop that has understandably rattled investors, who wonder why the sudden pullback—and whether it will continue.

Last week was packed with updates that covered broad sectors of the economy. This will be a much quieter week, with only two major economic reports scheduled for release.

In July, U.S. markets were up overall, between 1 percent and 2 percent, and bonds also had gains as interest rates declined. Although international markets were down slightly, by about 1 percent or so, they remained above their long-term trend lines. From a financial perspective, July wasn’t a great month, but it was a pretty good one for investors.

Yesterday, I appeared on CNBC's Nightly Business Report (my segment starts at 6:08) to discuss the market and my expectations for the month of August. Listen in to learn more.

July was a mixed month, with some good news and some bad. U.S. markets rose and fixed income went up, but emerging markets pulled back. In the U.S., second-quarter growth beat expectations, buoyed by the consumer. People were willing and able to spend, a trend that is likely to continue. Earnings also went up, another positive surprise. Still, risks remain, including the threat of Brexit under Prime Minister Boris Johnson.

Last week, the economic growth numbers came in stronger than expected, largely due to the strength of consumer spending. At the same time, concerns remain about the slowdown in business investment. Given these conditions, it occurred to me that now is a good time to look at the economy as a whole, to see exactly what it consists of—and what that view might tell us about the future.

There has been a great deal of coverage about the expected rate cut by the FOMC at its regular meeting this week. Markets are counting on a cut of 25 bps (one-quarter percentage point), which has pretty much been confirmed by the Fed. There is even some betting that the cut will be twice as much. In any case, this move has been widely cheered as a necessary precaution—an “insurance cut” in the jargon—to prevent an economic slowdown from turning into something worse. If we step back and look at the big picture, though, there is less to cheer about.

Last week saw a number of important economic updates, covering housing sales, business orders, and second-quarter growth. Much of the news came in better than expected, with mixed housing sales serving as the only fly in the ointment. This will be a very busy week for updates, as we finish off July and head into August.

With this morning’s report on economic growth, we see that the economy has beaten expectations once again. Markets anticipated growth would drop from 3.1 percent in the first quarter to 1.8 percent for the second quarter. Instead, the first estimate is for growth of 2.1 percent. That number doesn’t sound like a major difference, but it’s actually a big deal. Let’s take a look at why.