Updated: March 27, 2019
The yield curve is now “inverted.” This warning has preceded “seven of four” recent bear markets (more on this in a moment). Time to be safe and sell everything?
Before we stash cash in the mattress, let’s review the actual facts. Fundamental Capital’s Troy Bombardia, one of my favorite historical finance quants, has run the numbers on what happens to the S&P 500 when the 10-year “long” yield dives below the three-month rate:
- In 1966, 1973, 2000 and 2006, an inverted yield curve indeed preceded a big stock market pullback (usually by a year or two).
- Meanwhile in 1978, 1980 and 1989 it didn’t mean much.