Stocks Rise for Another 18 months After Inversion On Average. Don't run for the hills just yet.

https://www.cnbc.com/2019/08/13/after-yield-curve-inverts-stocks-typically-have-18-months-before-doom.html






After a key yield curve inversion, stocks typically have another year and a half before doom strikes

Thomas Franck@TOMWFRANCK
KEY POINTS
  • The fearsome inversion of the key 2-year and 10-year yields finally happened early Wednesday, sending markets reeling.
  • Historical analysis shows that stocks typically have another 18 months to rally after an inversion, then trouble hits.
VIDEO03:47
Stocks plunged on recession fears—Four experts on what it means for markets
The inversion of the yield curve has been a big worry on traders’ minds all year, but historical analysis shows that stocks typically have another 18 months to rally before equity markets start to see signs of trouble.
Strategists first started publishing research on yield-curve data last summer, when a rise in short-term rates narrowed the spread between the 3-month bill rate and 10-year yield to levels not seen since the financial crisis. That part of the curve eventually inverted, but stocks continued to hit new highs.
But they’ve been waiting for the main event: An inversion of the key 2-year and 10-year yields. That occurred early Wednesday and sent stock futures reeling as traders bet this was the reliable recession indicator and the one to watch.
“While an inversion has preceded each recession over the past 50 years, the lead time is extremely inconsistent,” Jonathan Golub, chief U.S. equity strategist at Credit Suisse, wrote in July 2018. “Historically, an inverted yield curve has been accompanied by a variety of other ominous economic signals including layoffs and credit deterioration.”
Stocks typically have 18 months of gains following inversion of the 2-10 spread until returns start to turn negative, Credit Suisse data showed.
The market rallies more than 15% on average in the 18 months following the inversion. A recession hits in 22 months after the inversion, according to Credit Suisse. Sequential losses can start to add up after 18 months, Golub’s analysis showed. Yields fall as bond prices rise.
For example, the 2-10 curve first inverted ahead of the financial crisis on Dec. 30, 2005. The market posted a cumulative gain of 18.4% in the 18 months thereafter, but returned intensifying losses after 1½ years.
Echoing Golub’s analysis, Bank of America Merrill Lynch cautioned on Monday that the “S&P 500 [is] on borrowed time if the 2s10s yield curve inverts.”
“The BofAML US Economics team suggests that recession risks are rising. The 3-month T-Bill vs the 10-year T-Note curve has already inverted and the risk is that the 2s10s curve inverts as well,” BofA technical strategist Stephen Suttmeier wrote.
“Sometimes the S&P 500 peaks within two to three months of a 2s10s inversion but it can take one to two years for an S&P 500 peak after an inversion,” he added, noting that a 2-10 inversion has preceded the most recent seven recession as well as nine of the last 12.
The average and median length of time from inversion to the start of recession and 15.1 and 16.3 months, respectively, the Bank of America analysis showed.
“The typical pattern is the yield curve inverts, the S&P 500 tops sometime after the curve inverts [see above] and the US economy goes into recession six to seven months after the S&P 500 peaks,” he added.
“After the initial drawdown, the S&P 500 can have a meaningful last gasp rally.”

Comments

Post a Comment

Popular posts from this blog

My Funds Portfolio 14 Jan 2021

Image
  Below is the overall performance of my funds. For CPF, I put everything into funds. I refuse to buy SGD stocks because you should see the performance of MSCI Singapore below. In the last 1 year, the performance was down 5.9%. it is only this year that the performance went up slightly but it is still down. If I had used my CPF and cash to buy SGX listed companies I would have done at best 5% even with superior stock picking.   Look at the other indices. MSCI world is up 16.1%, S&P500 is up 18.0%, China is up 38.6%, Europe up 6.2%, MSCI Asia ex Japan up 28.2%. NASDAQ was of course the best performer with 44.7%. So the growth is NOT in Singapore. It is either in the US or Asia, mainly China. Even the best companies from Singapore are listed in NASDAQ, e.g. SEA Ltd. We have become the “forgotten man” or “sick Man” of Asia in terms of stock markets.       The average performance of my funds are 25.8%. this is unrealised return and doesn’t include realised gains...
Read more

This Too Shall Pass

Image
This is a good article to serve as a reminder. At the risk of sounding old, with 23 years of experience in the financial industry, and it may seem corny, but I must admit “I’ve seen it all before”.  1998 Asian Financial Crisis, 2001 Sep 11, SARS in 2003, 2008 global financial crisis. The chart does look scary. It is the fastest 18% fall in history because we are in the age of automation and robots trading. ETFs are also causing this sell down as it indiscriminately liquidates stocks when investors sell. Below is the S&P500 ETF, SPY. 18% drop from 18 Feb to now, in 15 trading days. If you are very worried, stretch out your chart on a weekly basis, and over 5 years. It now looks like familiar territory? It is now resting on the 150 weeks moving average. On 24 Dec 18, it rested on the same moving average and shot up by over 25%.  On 8 Feb 2016, it tested again and recovered 53%. Now does it look familiar?  We have seen this happen twice previously in t...
Read more

A Bull Run is Born from Pessimism

Image
“A Bull Run is born from pessimism”. Some famous fund manager said that. I think it’s Peter Lynch. The bottom of the “Big Correction” was Christmas Eve, 24 th  Dec 2018. All stock markets rallied very hard in the first four months of 2019. But then the Trade War started, with Twitters threatening every other day of escalating embargoes. Asia ex Japan, MSCI Emerging Market and Japan were hit very hard, while the western world continued to rally. It was very difficult as an advisor to “push” or “persuade” clients to increase equity allocation because the news was simply very bad at every angle. There lies my repeated urgings to ignore mainstream news. One simply cannot make economic forecasts and translate that to equity returns! What matters is momentum and value! Pick the best value or cheapest stocks, sectors, funds, check the technicals if they are going to rise or fall. If they are rising, you buy. If they are falling, stay far away. Now that most of the easy money is made ...
Read more