Stocks and Inverted Yield Curve

Stock-Markets / Stock Market 2022 Nov 03, 2022 - 10:19 PM GMT

The yield curve has inverted which initially saw the stock market trade to a new bear market low following which entered into a powerful bull run, as has happened virtually every time that the yield curve has inverted i.e. initial stock market dips followed by a bull run that typically extends to over a year which the current price action looks set to replicate despite the recent double dip.

The yield curve inversion which has accurately called every modern recession signals that a recession is on the horizon within the next 9 to 18 months and that is the trigger for the bull run as the market will assume that the Fed will act looser before the US economy enters recession about 9 months from now, and thus the stock market discounts higher earnings over subsequent quarters in response to an expected looser Fed which remains the trend until the recession actually does start to bite and earnings fall.

What this suggests that stocks should enter a sustained bull run into Mid 2023, however it will be followed by subsequent weakness that depends on the actual severity of the forthcoming recession which is further complicated by the fact that we are already IN a technical recession!

So the yield curve implies stocks should head higher into Mid 2023 and then largely stagnate during the recession.

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By Nadeem Walayat

http://www.marketoracle.co.uk

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.

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

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