Monday was a spooky day for Wall Street: The five-year and 30-year Treasury yield curve inverted for the first time since 2006. This comes on the heels of the inversion of the five-year and 10-year Treasury yield and the two-year and five-year Treasury yield curves inverting last week.

Then this afternoon the two-year and 10-year Treasury yield curve inverted for the first time in three years. According to Bloomberg, prior to 2019, the curve inverted in August 2019 during a U.S. trade spat with China, the last persistent inversion of the Treasury curve occurred in 2006-2007 ahead of the 2008 recession.

So, why do these yield curve inversions tend to scare investors?

Simply put, an inverted yield curve has served as a precursor for a recession in the past. In fact, since 1956, every recession was preceded by an inverted yield curve. The folks at Bespoke noted that when the two-year and 10-year Treasury yield curve invert there’s a more than 67% probability that the U.S. will fall into recession in 12 months and a more than 98% probability that a recession will occur in the next two years.

So, what do the yield inversions mean for us as investors? Should we run and sell our stocks or stand pat?

In today’s Market360 article, I’ll answer both those questions. But first, let me explain why the yield curve is watched so closely in the first place.

Why the Yield Curve Matters

A yield curve is the relationship between short-term and long-term interest rates of fixed-income securities, like bonds, from the U.S. Treasury.

In a healthy bond market long-term interest rates are higher than short-term rates. In other words, the yield curve slopes up. When this is the case, investors can expect a bigger reward for lending out their money for the long haul. When the yield curve inverts it means short-term interest rates have moved above long-term rates. Take a look at the difference in the chart below.

Now, an inverted yield curve isn’t the catalyst that sparks a recession. Instead, it suggests bond investors are worried about the economy’s long-term prospects, Stephanie Roth, a senior markets economist for global wealth management at J.P. Morgan, said.

So, what’s going on right now?

The Current State of the Curve

Well, recent central bank action has caused the yield curve to invert. Last week, Federal Reserve Chairman Jerome Powell noted that the Federal Open Market Committee (FOMC) could raise key interest rates by 0.5% in response to surging inflation. Some Fed presidents are calling for larger increases going forward.

Right now, we have dramatically rising interest rates with a relatively flat or inverted yield curve. On top of that, we’re experiencing hideous inflation that will persist for the foreseeable future, ongoing supply chain issue, a new round of COVID-19 lockdowns in China, and crude oil is still up significantly from last year. That doesn’t even account for the ongoing effects of the conflict in Russia and Ukraine.

Everything considered, under no circumstances does the Fed want to invert the yield curve. It would cause undue stress on the banks that it regulates.

Now, here’s the good news: Stocks tend to rally following a Treasury yield curve inversion. Also according to Bespoke, the six times the two-year and 10-year Treasury yield curve inverted prior to today, the S&P 500 rallied an average 1.57% over the next month, 1.92% over the next three months, 4.83% over the next six months and 13.33% over the next 12 months.

The bottom line: An inverted yield curve can actually be a positive for the stock market.

Buy This, Not That

As we discussed in last week’s Market360 article, the financial media talking heads are pushing the big banks as good buys in the current market environment. But this couldn’t be further from the truth. The reality is banks are not good investments in the current yield curve environment because an inverted yield curve weighs on the banks’ profits.

Personally, folks, I’m not a fan of the banks. I used to work for a division of the government that is now part of the Federal Reserve. During my time there, I saw how they essentially “cook their books,” and that scarred me for life.

So, rather than invest in the big banks, I recommend “inflation proofing” your portfolio by adding fundamentally superior stocks that are profiting from rising prices.

In my Growth Investor service, we’ve already taken steps to align our Buy Lists to profit in the new environment. Just last week, I added nine exciting new stocks benefiting from rising prices for natural gas, crude oil and building materials.

Case in point: With the changes that we made this month, our Growth Investor stocks will now be characterized by 51.4% average annual sales growth and 370.9% average annual earnings growth.

I know it’s a scary time in the markets right now, which is why it’s critical to be invested in high-quality stocks. At the end of the day, it will be these stocks that emerge as the market leaders and deliver strong profits to investors who jumped in early.

P.S. There is a great divide opening up in America — and investing in my Growth Investor stocks will help get you on the right side of it. On one side is a new aristocracy that’s amassing more wealth more quickly than any other group in American history. For people like me, the one percent, life has never been better, more prosperous.

On the other side, the opposite is happening. Wealth is flowing out of the pockets of ordinary Americans at an unprecedented rate.

What’s happening is only going to gather in strength over the coming decades. It certainly won’t weaken.

Few Americans even know that any of this is going on. I’ve never seen anyone from my side of the chasm step forward to explain any of these things.

It’s why I put together this video. In it, I’ll lay out exactly what is happening, including several key steps every American should take right now.

It doesn’t matter if you have $500 in savings or $5 million. You can benefit from the information in this video.

It’s free to watch, and by doing so, I know you’ll be ahead of everyone else struggling to understand what is really going on.

The Editor hereby discloses that as of the date of this email, the Editor, directly or indirectly, owns the following securities that are the subject of the commentary, analysis, opinions, advice, or recommendations in, or which are otherwise mentioned in, the essay set forth below: