Economy

Of Dollars and Data: The Yield Curve Just Inverted… Now What?

Investors are aware of the macroeconomic implications of the yield curve inverting. But they need more than that. They need a specific investment strategy for handling a potential recession emerging in the coming months.

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  • How an investor will fare comes down to their asset allocation. Specifically, the percentage of assets in certain different types of sectors. Typically, financial analysis tends to make a trade-off between stocks and bonds.

    As Nick Maggiulli notes over at Of Dollars and Data, however, when stocks get risky, bonds are no safe-haven.

    With the Federal Reserve raising interest rates, bond yields are rising. But that’s another way of saying that bond prices are falling. that’s because a decline in price is what drives the yield higher.

    Based on the data, one-year after a yield curve inversion, stocks could be the best game in town. They tend to return 4.7 percent. While that’s just more than half their average return of 9 percent, it may be better relative to a drop in bond prices needed to drive yields higher.

    With bonds averaging 4 percent after inflation one year after a yield curve inversion, the data gives stocks a nod here.

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  • You can read the full analysis on the trade-off between stocks and bonds for today’s market conditions here.