Recession Fears High Following Inverted Yield Curve

August 21, 2019

08-21-2019 BLA

The HCM-BuyLine Alpha is doing a good job of keeping emotions in check during a very volatile market. The market was setting up to be a nice cup and handle pattern a few weeks back when a tweet came out about additional tariffs, and the yield curve inverted. This has shaken global confidence and sent fears of a recession running high. No one wants an inverted yield curve, but what does this really mean for equities?

Before we jump out a window, let’s do a little research on the history of an inverted yield curve. It might surprise you.

Surprise number 1.

Every time the 10-year and the 2-year yield curve has inverted, the S&P 500 has made a new high. The curve has inverted five times since 1976. We have blocked off where the curve inverted on the chart below, and every time new highs were made.

08-21-2019 Curve

Surprise number 2. 

The last three times it has inverted, stocks gained a whopping 33% before peaking. We are not talking about 3% or 4%, but 33%! Even in the most recent case of December 2005 (which is when more computerized trading was at work), the S&P 500 still gained another 25%. 

If there is a recession coming, we feel that it is down the road, but we have the HCM-BuyLine Alpha on our side to take emotion out of the mix. There are still a lot of reasons to be bullish, including (i) strong corporate earnings, with over 490 of the S&P 500 reporting, and 71% beating expectations (ii) a White House that wants stocks to go higher (iii) and a dovish Fed, which is still the most powerful central bank in the world.

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