Early Friday futures action shows Wall Street won’t break a three-day losing streak. No surprise why: bond yields, which have enjoyed a tight inverse correlation to stocks of late, remain near recent highs.
Importantly, during these occasions the inversion was shown to have preceded the eventual recession by a wide range of between seven to 25 months, with an average lag of 14 months. The crucial issue for equity investors is that they should be wary of the average double-digit percentage point stock market rallies that come in the immediate aftermath of an inversion.
“On average, equity markets ‘bottomed’ about 20% below where they were when the curve first went into inversion. The range of outcomes would be consistent with the S&P 500 having more than 20% downside from the recent market highs,” Darda says. For more market updates plus actionable trade ideas for stocks, options and crypto, subscribe to MarketDiem by Investor’s Business Daily.
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