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Before I dive deeper into this story, I want to point out how important it is to keep an eye on economic indicators like the yield curve as opposed to getting swept up in the negative commentary and making emotional, knee-jerk reactions. This can be difficult to do, especially in the midst of negative news stories. So, to potentially help you do this, we are offering all readers a look into our just-released November 2019 Stock Market Outlook report.
This 22-page report contains some of our key forecasts to consider:<\/p>\n\n\n\n
- What produces U.S. optimism?<\/em><\/li>
- Forecast for the S&P<\/em><\/li>
- Small-cap vs. large-cap returns<\/em><\/li>
- Which sectors are hot and which are not?<\/em><\/li>
- What industries within those sectors most merit your attention?<\/em><\/li>
- Odds of recession<\/em><\/li>
- And much more.<\/em><\/li><\/ul>\n\n\n\n
If you have $500,000 or more to invest and want to learn more about these forecasts, click on the link below to get your free report today!
IT’S FREE. Download the Just-Released November 2019 Stock Market Outlook<\/a>1<\/a><\/sup><\/strong><\/p>\n\n\n\n_________________________________________________________________________<\/p>\n\n\n\n
Yield Curve as\nMeasured by 10-Year U.S. Treasury Minus 3-Month US Treasury<\/strong><\/p>\n\n\n\n
![\"\"](\"https:\/\/zacksim.com\/blog\/wp-content\/uploads\/2022\/02\/fredgraph_7-1-1024x395.png\")
<\/figure>\n\n\n\nSource: Federal Reserve Bank of St. Louis2<\/sup><\/em><\/strong><\/p>\n\n\n\n
Yield Curve as\nMeasured by 10-Year US Treasury Minus 2-Year US Treasury <\/strong><\/p>\n\n\n\n
![\"\"](\"https:\/\/zacksim.com\/blog\/wp-content\/uploads\/2022\/02\/fredgraph_5-1024x395.png\")
<\/figure>\n\n\n\nSource: Federal Reserve Bank of St. Louis3<\/sup><\/em><\/strong><\/p>\n\n\n\n
Now that the yield curve has turned positive again, one\nwould think that the recession narrative would ease up a bit, giving way to\nmore positive readings on economic growth. But that hasn\u2019t been the case \u2013 as\nfar as I can tell, the \u2018wall of worry\u2019 has gotten even bigger. I would argue this\nis good news for stocks, for three reasons.<\/p>\n\n\n\n
For one, it was not very well disseminated that while yield\ncurve inversions almost always precede recessions, it does not necessarily happen right away.<\/em> Recessions triggered by the inversion of the yield curve don’t,\non average, materialize until 22 months after\n<\/em>the event, and during that time, the S&P 500 has tended to rally. In\nthe post-World War II era, on average, the S&P 500 has rallied more than 15%\nin the 18 months following a yield curve inversion.4<\/sup> <\/p>\n\n\n\n
The\nsecond reason is that we have not seen anywhere near the deterioration in the\nlabor (jobs) or credit markets that we have seen historically with yield curve\ninversions. Lending growth at banks remains positive and net interest margins\nare higher than what the yield curve implies. The rates banks are charging on\nmortgages, credit cards, and business loans are materially higher than the\nyields on the 10- and 30-year U.S. Treasury bond. 4<\/sup><\/p>\n\n\n\n
Finally,\nit is important to take note when positive economic developments are largely\nignored. When the yield curve inverted over the summer, it grabbed headlines\nand fueled recession chatter on a near-daily basis. But when the yield curve\nturned positive \u2013 which should have brought relief to the markets that a recession\nfear faded \u2013 it was largely tuned out by most pundits and the press. When\npessimism rules the day, expectations are often lowered too far and recession\nrisks get priced-in \u2013 giving way for underappreciated economic positives to ultimately\ndrive stock prices higher, in my view. <\/p>\n\n\n\n
Bottom Line for Investors <\/strong><\/p>\n\n\n\n
In my view, we\u2019re in an environment where even the slightest\nbit of negative news adds to the \u201cwall of worry,\u201d but positive news is largely\nignored. The yield curve in 2019 offers a perfect example of how this plays out:\nA yield curve inversion happens over the summer and signals forthcoming\nrecession, followed by the yield curve turning back to the positive a few\nmonths later and receiving no air time. <\/p>\n\n\n\n
The stock market is ultimately driven by expectations versus\nreality, in my view, and when expectations are low and falling \u2013 but the reality points to economic growth\n(even if middling)<\/em> \u2013 I think the positive surprises along the way are what\nlead to higher prices. <\/p>\n\n\n\n
- Forecast for the S&P<\/em><\/li>