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There is a lot of fear in the markets now.
Inflation… War in Ukraine… Rising interest rates…
And now the “inverted yield curve.”
What is the inverted yield curve … and why is it important to you?
If you are applying for a mortgage, you know that the two most popular options are a 15-year mortgage or a 30-year mortgage. The interest rate you will pay on a 15-year mortgage is lower than on a 30-year one.
That makes sense, right? With a 30-year mortgage you borrow money from the bank for twice as long. So you have to pay a higher rate.
The same is true of the interest rates that the U.S. government pays on its bonds. In 99.9% of cases, the longer the bond lasts, the higher the rate it pays. A 10-year bond almost always pays more interest than a two-year bond.
However, last week the interest rate on 10-year US bonds fell below the interest rate on 2-year bonds.
Investors call this “inverted” situation inverted yield curve.
This is usually a sure sign that something is wrong with the US economy
It is rare for the yield curve to be inverted. Since 1969, this has happened only 8 times. The last time this happened was in September 2019. The COVID-19 recession came seven months later.
Earlier it happened in January 2006. About two years later, we entered the 2008 financial crisis. US stocks fell 57% on 08-09.
Another bad news: every time the yield curve has been reversed over the past 50 years, a recession eventually ensues.
The recession is detrimental to stocks. From 1920 to 2019, American stocks fell 10 times in the “bear market”. Eight out of 10 are in recession.
That sounds pretty bad, Stephen …
But here’s a detail №1 about the inverted yield curve that most investors don’t hear about …
The inversion of the yield curve usually warns of a recession more than a year ahead. From the moment the yield curve is first inverted, the recession occurs on average in about 18 months.
Eighteen months is a long time. In 18 months we will talk about the next presidential election. Your children will be two classes older.
And for 18 months after the yield curve is inverted, stocks usually work well … and sometimes they work BIG.
The last time the yield curve was reversed in 2019, the S&P 500 rose 19% before the collapse of COVID-19.
When this happened in 2006, the S&P 500 crept up 22% before the financial crisis.
And before that, in 1998, stocks rose 55% to a peak. And the Nasdaq jumped 210%, forming the infamous dot-com bubble.
Not only is there a long delay between this signal flashing red and trusting stocks, we can say that the inversion of the yield curve is a BATH signal for stocks, at least in the short and medium term.
That’s what I’m doing now with my money
Many investors believe they have only two options now that the yield curve has reversed:
- Sell all your shares and put money in their bank accounts …
- Or wait and hope that the next recession will not destroy them.
This “all or nothing” mentality is a mistake of beginners. There is a better way.
Don’t panic. COOKING.
Prepare for disciplined risk management with every stock you own. Any investor can do this using “feet”.
As you may know, a “stop” is a predetermined price at which you will sell shares. Let’s say you buy stocks for $ 100 and put a 20% stop on them. If the stock drops to $ 80, you sell immediately. No questions asked and guess the solution.
Used properly, the stops keep any losses small, allowing your winners to ride. So if American markets continue to work well for one year … two years … three years … or more … your egg will grow.
And if tomorrow’s markets deteriorate, your stops will act as a “switch” for your portfolio. They will pull you out before the stock loses too many positions.
Let me be clear: the inversion of the yield curve is a “red flag” that needs to be taken seriously
This is one of the most reliable indicators of the recession. This is definitely not good. Ignoring this would be irresponsible.
But, as I said, 18 months is a long time. The average person has about 35 years of work, or 420 months, to create wealth by investing.
Eighteen months is more than 4% of your investment life.
Are you ready to waste 4% of your investment life? To leave your money aside until a potential recession comes and goes?
With scary headlines this may “feel” like a safe and sensible thing, but the data is clear.
Over the next 18 months or so the yield curve indicates that we are in an environment where it has historically been good or excellent to own stocks.
Think twice before spending.
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Stephen McBride is the lead analyst Risk hedging.
Stock News Contributor: Stephen McBride
Source: Stock news
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