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What seven decades of yield-curve history tells us about the business cycle and the stock market, strategist says

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The bond-yield curve has inverted 12 times since 1950, and equity investors should be wary.

Early Friday futures action shows Wall Street may struggle to 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 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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