Nearly 70 Years of History Shows That: Should Not Be Overly Optimistic About Stocks Rallies Following a Yield Curve Inversion.

Chatterbox Moo wrote a column · Jan 16 04:49

Since the yield curve inverted deeply in July 2022- where 1-year Treasury yields are notably higher than 10-years - the S&P 500 has surged over 25%. Market sentiment has skyrocketed, while the recession predictions suggested by the yield curve inversion have been dismissed by investors.

That would be a mistake, says Michael Darda, chief economist and market strategist at Roth MKM.

Darda has examined seven-decades of the yield curve and how it relates to the business cycle and equity market performance. He found that there have been 12 inversions since the 1950's. Importantly, during these occasions the inversion was shown to have preceded the eventual recession by a wide range of between 7 to 25 months, with an average lag of 14 months.

“Since we are currently 17 months into inversion, it is woefully premature to presume the yield curve has given a false signal and the fabled soft landing is in the bag,” Darda says.

The crucial issue for equity investors is that they should be wary of the average double-digit stock rallies that come in the immediate aftermath of an inversion.

That's because Darda's research shows in nearly seven decades there has never been a post-inversion equity rally that was not completely reversed going into subsequent recessions or bear markets.