The Dreaded Yield Curve Inversion

If you have been following the news, you know that financial markets across the globe have experienced increased volatility in recent weeks from global trade concerns, protests in Hong Kong, and political uncertainty. The volatility was exacerbated this week largely due to an inverted yield curve - which is when certain intermediate and long-term U.S. Treasuries bonds yield less than shorter-term Treasuries. In this case, the concern was raised due to the yield on two-year Treasury notes being slightly higher than that of the 10-year Treasury note. Many market prognosticators tie this to an immediate sign of recession, but the data below deserves consideration. The yield curve currently looks like the chart above.

While no one is able to accurately and consistently predict the future, it's interesting to note that on average, the S&P 500 has returned 2.5% after a yield-curve inversion in the three months following the inversion episode, while it has gained 4.87% in the following six months, 13.48% a year after, 14.73% in the following two years, and 16.41% three years out, according to Dow Jones Market Data. On top of all that, a yield-curve inversion doesn't usually result in an economic recession instantly. From 1956, past recessions have started on average around 15 months after an inversion of the 2-year/10-year spread occurred, according to Bank of America Merrill Lynch.

As a financial advisor, I appreciate how unnerving it can be to experience market volatility, especially for retired clients. Then top it off with 24-hour media coverage (made for traders and not investors) and it can seem like the markets have been tumbling for months, when in fact the S&P 500 is actually up more than 13% year-to-date and currently sits just 6% lower than its record high.

Always remember, the best way to manage unpredictable market declines is to maintain your long-term investment outlook with a diversified portfolio across multiple asset classes. History shows us that the market generally does recover from these dips. We are closely monitoring market conditions, and we're here to help with perspective or reassurance.  Please reach out to us if you want to discuss your portfolio or any other concerns.