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Yield Curve Inversion and the Stock Market

Stock-Markets / Stock Markets 2018 Aug 07, 2018 - 05:43 PM GMT

By: Nadeem_Walayat

Stock-Markets

In part 5 in this stock market analysis series I take a look at what the Yield Curve Inversion implies for stocks.


Yield Curve Inversion

An inverted yield curve is basically when the yield on 2 year US government bond yield exceeds the 10 10 year US bond yield due to investor uncertainty of the near term economic outlook and thus investors opt to disinvest from risky assets in favour of safer longer term government bonds thus driving down bond yields below that of nearer term bonds. And the closer the yield curve gets towards inversion the greater the alarm bells ring for a future recession. So far the yield curve inversion has successfully forecast the last 3 economic downturns in the United States of the past 40 years. Though the YCI has proved less reliable elsewhere, especially for Australia.

So where does the yield curve currently stand ?

The spread between the 2 year and 10 year US bonds has greatly narrowed towards an inversion bouncing off a low of 0.24 to currently stand at 0,29. And given the fact that the US Fed is raising short-term rates with 2 more rate hikes totaling 0.5% planned for 2018, then that can only lead to a further narrowing of the spread towards an inversion by the end of this year.

So yes, the Yield curve is narrowing towards an inversion, which would be a warning signal for future economic weakness. Which implies trade war consequences for the US becoming manifest some months AFTER the yield curve inverts. However both the yield curve trend towards inversion and the delay in impact are unlikely to become manifest during 2018, i.e. probably around Spring 2019. So this does not bode well for the prospects for the stock market for much of 2019, but first the yield curve needs to invert, which it has NOT done yet. So the YC is something to keep an eye on to come back to in future updates as there is even a possibility that this time things could be different i.e. the YC could just reflect CHINESE economic and financial weakness as capital is finding it's way into the relative safety of US Government bonds, hence the narrowing in the US yield curve.

Next > US Presidential Cycle / Seasonal Analysis

Part 6 will be published shortly as my core analysis and detailed trend forecasts are first made available to Patrons who support my work. To get immediate and First Access to ALL of my analysis and trend forecasts then do consider becoming a Patron by supporting my work for as little as just $3 per month. https://www.patreon.com/Nadeem_Walayat

Your analyst,

Nadeem Walayat

http://www.marketoracle.co.uk

Copyright © 2005-2018 Marketoracle.co.uk (Market Oracle Ltd). All rights reserved.

Nadeem Walayat has over 30 years experience of trading derivatives, portfolio management and analysing the financial markets, including one of few who both anticipated and Beat the 1987 Crash. Nadeem's forward looking analysis focuses on UK inflation, economy, interest rates and housing market. He is the author of five ebook's in the The Inflation Mega-Trend and Stocks Stealth Bull Market series that can be downloaded for Free.

Housing Markets Forecast 2014-2018The Stocks Stealth Bull Market 2013 and Beyond EbookThe Stocks Stealth Bull Market Update 2011 EbookThe Interest Rate Mega-Trend EbookThe Inflation Mega-trend Ebook

Nadeem is the Editor of The Market Oracle, a FREE Daily Financial Markets Analysis & Forecasting online publication that presents in-depth analysis from over 1000 experienced analysts on a range of views of the probable direction of the financial markets, thus enabling our readers to arrive at an informed opinion on future market direction. http://www.marketoracle.co.uk

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any trading losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors before engaging in any trading activities.

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© 2005-2018 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


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