When To Expect Stocks To Fall If The Yield Curve Is Still Relevant
An inverted yield curve is one of the most reliable leading indicators of an ensuing recession.
That is, when longer maturity Treasury yields such as that of 10, 20, or 30-year bonds are lower than the yields of short-term Treasury yields, this signifies the market betting that the Federal Reserve will soon lower the overnight rate. A lower overnight rate will ripple out to lower short-term rates.
It's up for debate whether an inverted yield curve still works well as a leading indicator of economic weakness ahead. Those who say it doesn't have their reasons for thinking so, but I would prefer to err on the side of the reliability of an inverted yield curve rather than argue that its relevance is obsolete. This time, in my judgment, is not actually that different, despite the perennial assumption near market peaks that it is.
I want to explore when the stock market tends to fall leading up to recessions, and when to expect a potential future recession to start based on historical occurrences of inversions.
Stock Performance Before and During Recessions
Leading up to prior recessions, when did stocks (as measured here by the S&P 500) fall?
The recession of the early 1990s was relatively mild, and stocks did not fall at all until after the recession had started. This is true also of the brief recession in 1980 as well as the recession of 1981 and 1982 (not pictured below).
Data by YCharts
Prior to the recession beginning in 2001, stocks started... Read more