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Looks positive -- After the yield curve inverts — here’s how the stock market tends to perform since 1978

  • Last Updated:
  • Aug 18th, 2019 1:54 am
14 replies
Deal Fanatic
Jul 1, 2007
8382 posts
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This is what everyone who knows a thing about market history, and isn't the media sensationalizing whatever they can, is yelling from the rooftops.

The yield curve inversion is actually a GOOD thing for stock market returns for the next year or two. Increase your risk allocation now and just be weary starting around a year from now.
Money Smarts Blog wrote: I agree with the previous posters, especially Thalo. {And} Thalo's advice is spot on.
Deal Addict
Jan 20, 2016
2028 posts
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Houston, TX
How many ways media uses to show the same fact in different ways: 3/4 times stocks (s&p500) goes higher, every 10y rolling TR was positive, average return over 10y was 8% (e.g. doubling over that time) etc....At least for last 50 or 60 years
All that despite (or because?) or oil embargo, Vietnam war, Watergate, dotcom...

Just funny to watch many articles talking about "recession started" based on Wed performance while other already "refocused" and playing different tune as indexes go up :)
Make the face great again
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Apr 21, 2004
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asa1973 wrote: How many ways media uses to show the same fact in different ways: 3/4 times stocks (s&p500) goes higher, every 10y rolling TR was positive, average return over 10y was 8% (e.g. doubling over that time) etc....At least for last 50 or 60 years
All that despite (or because?) or oil embargo, Vietnam war, Watergate, dotcom...

Just funny to watch many articles talking about "recession started" based on Wed performance while other already "refocused" and playing different tune as indexes go up :)
This was published when it was down.
Sr. Member
Jun 28, 2018
756 posts
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Toronto
Could be other factors such as stimulus measures. QE. Pending rate cuts. Etc
The Distracted Investor

Dividends through quality companies 😃 Though I usually lose money with trades :facepalm:
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Apr 21, 2004
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A combination of those would have been performed after a recession. This is from 1978 onward, not from the 1800's.
Sr. Member
Mar 16, 2018
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Hamilton
Thalo wrote: This is what everyone who knows a thing about market history, and isn't the media sensationalizing whatever they can, is yelling from the rooftops.

The yield curve inversion is actually a GOOD thing for stock market returns for the next year or two. Increase your risk allocation now and just be weary starting around a year from now.
If your job is tied to industries that could be decimated by a credit crunch and you have no income to invest with after your year or two of great returns because you're laid off or underemployed, things might not be so great...
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ownthesky wrote: If your job is tied to industries that could be decimated by a credit crunch and you have no income to invest with after your year or two of great returns because you're laid off or underemployed, things might not be so great...
Credit crunch means cannot pay on loans.

How can inverted yield cause interest rates, especially tied to bond yields, to rise and cause default?

I know we are talking in simplistic terms here.
Sr. Member
Jun 28, 2018
756 posts
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Toronto
alanbrenton wrote: A combination of those would have been performed after a recession. This is from 1978 onward, not from the 1800's.
Monetary stimulus has been ongoing except for very recently with attempted QT Quantitative Tightening by the fed. This QT is now being reversed, and separately globally other central banks have already been loosening conditions with rate cuts. ECB is expected to expand QE. Hence, we've been seeing negative rates globally.

So the question is how long does it take for the impacts of additional QE to circulate through the global system. A lot of added litquidity could start raising financial markets.

US Fed speaking at Jackson Hole next Friday I think. Will be interesting to hear what they project.
The Distracted Investor

Dividends through quality companies 😃 Though I usually lose money with trades :facepalm:
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johnnychi wrote: Monetary stimulus has been ongoing except for very recently with attempted QT Quantitative Tightening by the fed. This QT is now being reversed, and separately globally other central banks have already been loosening conditions with rate cuts. ECB is expected to expand QE. Hence, we've been seeing negative rates globally.

So the question is how long does it take for the impacts of additional QE to circulate through the global system. A lot of added litquidity could start raising financial markets.

US Fed speaking at Jackson Hole next Friday I think. Will be interesting to hear what they project.
How come 30 year US bond yields hit all time low this month instead of the peak in QE?
Sr. Member
Jun 28, 2018
756 posts
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alanbrenton wrote: How come 30 year US bond yields hit all time low this month instead of the peak in QE?
If economic data has been deteriorating and along with geo events like Brexit and US/China trade worries going on then there is likely an impetus for a flight to safety. Gold as an example has been climbing to multi year highs while USD is also high. Very curious situation.
https://www.marketwatch.com/investing/index/dxy (Overlay with Gold for 10 years)
The Distracted Investor

Dividends through quality companies 😃 Though I usually lose money with trades :facepalm:
Deal Guru
Jan 27, 2006
13851 posts
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Vancouver, BC
Inversions is really a signal not that a recession is coming but for the investor to get their investment house in order over the next 12 to 18 months (yes, that's shorter than the 18 to 24 months that an inversion typically singles for a recession... I believe no one gets burned too badly if they are prepared a bit early but everyone gets burned to a crisp if they are late).

In other words, start thinking about taking profits, planning for the tax issues from those profits, and where to park your money for your own personal situation (ie - rebalance your portfolio, bulk up your emergency fund, reassess your risk profile, or just stuffing cash in your mattress). There is no reason to start panicking for the next little while.
Deal Addict
Oct 21, 2014
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craftsman wrote: Inversions is really a signal not that a recession is coming but for the investor to get their investment house in order over the next 12 to 18 months (yes, that's shorter than the 18 to 24 months that an inversion typically singles for a recession... I believe no one gets burned too badly if they are prepared a bit early but everyone gets burned to a crisp if they are late).

In other words, start thinking about taking profits, planning for the tax issues from those profits, and where to park your money for your own personal situation (ie - rebalance your portfolio, bulk up your emergency fund, reassess your risk profile, or just stuffing cash in your mattress). There is no reason to start panicking for the next little while.
The article alanbenton linked seems to suggest the exact opposite of reducing equity exposure... that in most cases two years out from a yield curve inversion markets are significantly higher in most circumstances.

Investors should also have their emergency fund in place long before investing and have their risk profiles figured out during more placid times. You don't want to have the psychology of a potential short term downturn weighing on your mind while trying to determine your asset alloc for the next ten years.

My guess is that think the reason we see such panic on this forum during periods of volatility is that individual investors have too much in the market and are relying on money in the market as being available at a moment's notice, and the reason you have to do the above work is to hold on during the inevitable and unavoidable downturns. If you can't, that's the very definition of a weak hand, and definitely a situation to be avoided.
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Jul 1, 2007
8382 posts
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ownthesky wrote: If your job is tied to industries that could be decimated by a credit crunch and you have no income to invest with after your year or two of great returns because you're laid off or underemployed, things might not be so great...
A credit crunch would generally coincide with rising rates, especially on the short end.

Something that media pundits and such seem to be ignorant about when it comes to talking about the yield curve inversion and the past precedent of predicting recessions is the fact that every previous YCI mostly involved short-term rates rising due to either/or fed raising rates to tame inflation (in the 70s, early 80s) or just less liquidity available. Those kinds of things kill economies.

Instead, today we have short term rates low and going lower. Good for businesses who need to finance inventory purchases short-term, good for keeping our LOC rates low. And we have long term rates going even lower! Great for businesses financing expansions (or just rolling over their mountain of debt in some cases), good for consumers getting or refinancing mortgages, etc.
Money Smarts Blog wrote: I agree with the previous posters, especially Thalo. {And} Thalo's advice is spot on.
Deal Guru
Jan 27, 2006
13851 posts
6778 upvotes
Vancouver, BC
Gungnir wrote: The article alanbenton linked seems to suggest the exact opposite of reducing equity exposure... that in most cases two years out from a yield curve inversion markets are significantly higher in most circumstances.
That's correct. But what I'm saying is it's better to be rebalancing or thinking of selling when the market is rising rather than when the market is falling. Rising markets don't have that feeling of panic that falling markets do which typically causes people to make poor decisions over a short period of time.
Gungnir wrote: Investors should also have their emergency fund in place long before investing and have their risk profiles figured out during more placid times. You don't want to have the psychology of a potential short term downturn weighing on your mind while trying to determine your asset alloc for the next ten years.
Correct. But most investors don't think about their emergency fund until they think they may need it which by then is too late. The best time to fund an emergency fund is when you don't need it and that's generally in an upward market. And most investors tend to ride stocks upwards until they start falling and falling hard. By that time, it's too late to do good financial planning.

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