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