Yield curves are a reliable economic indicator, but a poor market timing tool.
Blink and you missed it, but the yield on the 2-year Treasury note traded briefly above the yield on the 10-year note Tuesday afternoon, temporarily inverting the yield curve and triggering recession warning bells.Data shows that it hasn’t paid in the past to abandon stocks the moment the Treasury yield curve turns upside down, with short term yields higher than longer term yields.
“For example, investors who sold when the yield curve first inverted on Dec. 14, 1988, missed a subsequent 34% gain in the S&P 500 index,” Levitt wrote. “Those who sold when it happened again on May 26, 1998, missed out on 39% additional upside to the market,” he said. “In fact, the median return of the S&P 500 index from the date in each cycle when the yield curve inverts to the market peak is 19%.
Moreover, researchers have argued that a persistent inversion is necessary to send a signal, something that hasn’t occurred yet, but remains widely expected. Indeed, the divergence between the two closely followed measures of the curve has been a head scratcher for some market watchers.
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