Yield Curve Flattening
The biggest story in finance, besides the hyperbolic rise in bitcoin, is the flattening of the yield curve. It shouldn’t be a surprise that the yield curve is flattening because it generally flattens during expansions. The two reasons why it is a big story are because investors are hyper focused on when this bull market will end because it is closing in on becoming the longest one ever and because the yield curve has exited the one year period where it was stable. The sand time keeper that is the yield curve was temporarily turned on its head before the sand ran out. Besides the fact that this might be the longest economic expansion ever, the market is nearing the longest streak without a 5% correction; it already has the longest streak without a 3% correction. As you can see from the chart below, this market has had the 5th longest streak without a 5% selloff; in a few weeks, it will become the longest.
As I mentioned, the yield curve flattening is a big story. It’s helpful to see which assets have performed the best in this scenario to help us understand which assets will do the best in the next 12 months. The table below lays out the past few instances when the yield curve flattened from 100 basis points to an inversion. To be clear, that’s when the 10-year bond goes from having a 100 basis point higher yield than the 2-year bond yield to when the 2-year yield is higher than the 10-year yield. As you can see, the energy sector has had the best performance as it outperformed the S&P 500 83% of the time. However, it only has a median return performance of 5.0% which is lower than the 6.6% median return of the S&P 500. This chart’s best recommendation is to avoid the consumer discretionary sector and utilities. This price performance is likely because there is inflation at the end of cycles which is good for energy as oil prices rise, but bad for tech, consumer discretionary, and utilities.
