Everyone’s talking about a potential “yield curve inversion” these days, and with good reason. But the story you’re hearing about in the mainstream media — that a yield curve inversion means the death of the stock market — isn’t just overblown. It’s down-right wrong.
In fact, our analysis suggests that the best thing that could happen to stocks here and now is a yield curve inversion.
We believe that, if the yield curve inverts, the data says the stock market will have a massive “melt-up” over the next two years. We’re talking 20% or greater gains.
So, while everyone else is biting their nails thinking about a yield curve inversion, we’re chomping at the bit. Go ahead and invert, yield curve! In our investment research advisory — Innovation Investor — we’re ready for this inversion. And, more than that, we’re ready to make a lot of money after the inversion happens.
Let me tell you why.
The Myth of Yield Curve Inversions
If you’ve been investing for a while, you’ve heard of yield curve inversions… and you’ve learned to be afraid of them.
The Treasury yield curve plots the yields of differently dated Treasury securities, from a few months to 30 years. Normally, the curve slopes upward. That is, the 3-month Treasury yield is below the 2-year Treasury yield, which is below the 10-year Treasury yield, which is below the 30-year Treasury yield, etc. This is indicative of a bond market that has faith in the U.S. economy.
However, when the bond market loses faith in the U.S. economy, they pile into long-term bonds to lock in yields, which suppresses yields on the long end of the curve. When such action gets extreme, you get an inversion in the yield curve. That is, long-term Treasury yields fall below short-term Treasury yields.
Each time the yield curve has inverted, it’s been followed by a recession. To illuminate, going back to 1980, 10-2 yield curve inversions (when 10-year Treasury yields drop below 2-year Treasury yields) precede every single U.S. recession.
As of this writing, the 10-2 Year Treasury yield spread sits at just 20 basis points, a level which history says will very likely lead to an inversion in the near future. If so, then history also says we are due for a recession. No wonder everyone’s spooked.
But hold your horses.
This cursory analysis of yield curve inversions misses the bigger picture. And it misunderstands that yield curve inversions are actually a great reason to buy stocks.
The Truth About Inversions
The truth about yield curve inversions is they are forward looking — like financial markets. That is, just as stocks tend to move before a big event, yield curve inversions tend to happen well before a recession hits.
Just look at the data.
The yield curve has inverted five times since the 1970s. On average, after the inversion, stocks rallied — by a lot.
Specifically, stocks tend to rally for more than a year post-inversion, gaining 20%-plus during that year. More recent data (which is arguably more relevant data) is even more bullish. The late-1990s inversion was followed by a 22-month-long stock market rally wherein stocks gained 40%. The mid-2000s inversion was followed by a 20-month-long stock market rally wherein stocks gained 22%.
In other words, yield curve inversions may be medium-term bearish indicators, but they are near-term bullish indicators, too.
Now, here’s the thing about today’s market: We aren’t even at a yield curve inversion yet.
That may happen by summer if the Fed stays hawkish. Let’s say we invert in July. Then, recent history would imply that stocks would proceed to rally by more than 20% into July 2024.
That’s a long way out.
So, if you’re biting your nails about a yield curve inversion, you’re also positioning yourself to miss out on what could be the biggest stock market melt-up since the rebound from the Covid crash in 2020.
Which is why we’ve bullishly positioned our flagship Innovation Investor service for a big market rally.
The Final Word
A lot of folks are worried about the stock market right now — we’re not.
We actually think that, on the heels of a big drop across the market, stocks are due for a big rebound rally over the next few months.
Here’s the short list for why that’s true:
Valuations are discounted, with the S&P 500 now trading in line with its five-year average valuation multiple.
The geopolitical situation in Ukraine appears to be improving, as Russia continues to make zero militaristic progress (and the more that remains true, the more likely Putin will be overthrown or forced to resign).
The Covid-19 situation in China is being contained.
And the Fed has already moved past its first rate hike.
Basically, all these geopolitical and macroeconomic risks from February and March that had everyone freaking out are gradually fading.
We think they’re going to continue to fade.
If they do, then stocks aren’t going to crash from here — they’re going to rebound. In a huge way. And, as we all know, the biggest gains in the market happen in the first innings of big rebounds.
We’re ready for that rebound. Are you?
If not, it’s time to learn how to position yourself for big stock market gains in 2022.
On the date of publication, Luke Lango did not have (either directly or indirectly) any positions in the securities mentioned in this article.
