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Inverted Yield Curve

The yield curve recently inverted, which means you now earn a higher rate of interest on two-year US Treasury bonds than you do on ten-year US Treasury bonds. In a “normal” environment, you should earn a higher rate of interest for locking up your money for a longer time period. I wrote about this concept last year as the yield curve was flattening, and it’s worth revisiting now that the curve has inverted. 

As I mentioned in that article, an inverted yield curve has historically been a leading indicator of a recession. This might lead you to think you should move out of the stock market, but a recent research paper by Ken French and Eugene Fama argues this would be a bad move. They conclude “We find no evidence that inverted yield curves predict stocks will underperform Treasury bills for forecast periods of one, two, three, and five years.” 

As Ben Carlson explains in this article about the research paper, “They compared three broad market indexes, using the U.S. stock market, the World stock market, and the World ex-U.S. stock market. The switching strategy of going from stocks to cash underperformed a long-only buy and hold strategy in all 24 instances using the U.S. and World markets. The yield curve signal also underperformed in 19 of 24 World ex-U.S. backtests.” 

It is impossible to predict the future direction of the stock market. It’s entirely possible this latest inversion of the yield curve could lead to a recession. It’s also possible the stock market will decline as a result of the recession. However, attempting to time the markets to take advantage of this is impossible. Even if you were to get out of the market at the right time, odds are you wouldn’t know when to get back in. We continue to believe in a long-term buy and hold strategy, using a diversified low-cost portfolio that is based on target allocations developed for your personal situation, rebalanced periodically. If you’d like to discuss your investment portfolio, please feel free to reach out to me.

-Chris Benson, CPA/PFS

The views expressed represent the opinions of L.K. Benson & Company and are subject to change. These views are not intended as a forecast, a guarantee of future results, investment recommendation, or an offer to buy or sell any securities. The information provided is of a general nature and should not be construed as investment advice or to provide any investment, tax, financial or legal advice or service to any person. Please see Additional Disclosures more information.