What’s Next For Stocks When The Yield Curve Inverts

Even though the 10 year – 3 month yield curve is the more useful & timely yield curve, the 10 year – 2 year yield curve is still the most popular yield curve. The 10 year – 2 year curve is almost inverted.

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At this rate, the 10 year – 2 year curve will invert rather quickly: within the next few months. What happens next to the U.S. stock market (historically) after the 10 year – 2 year curve becomes inverted for the first time in each economic expansion?

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Here’s what happens next to the S&P 500 after the 10 year – 2 year yield curve inverts for the first time in each economic expansion.

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Here’s another way to visualize this data.

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Let’s look at the historical cases in detail.

December 27, 2005

The S&P rallied for another 2 years before it began a bear market.

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May 26, 1998

The S&P rallied for another 2 months before it began a “big correction”.

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December 13, 1988

The S&P rallied for another 1.5 years before it began a “big correction”.

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September 12, 1980

The S&P rallied for another 2 months before it began a “big correction”.

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August 17, 1978

The S&P rallied for another 1.5 years before it began a “big correction”.

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Conclusion

As you can see, the U.S. stock market usually keeps going up after the 10 year – 2 year yield curve becomes inverted. This is because the 10 year – 2 year yield curve inverts TOO EARLY. It gives a bearish signal too early.

The 10 year – 3 month yield curve is still at 0.8%, which means that it won’t be inverted in the next few months.

Don’t be too concerned about the 10 year – 2 year yield curve’s impending inversion right now. Focus on the 10 year – 3 month yield curve.