Even though the 10 year – 3 month yield curve is the more useful & timely yield curve, the 10 year – 2 year yield curve is still the most popular yield curve. The 10 year – 2 year curve is almost inverted.
At this rate, the 10 year – 2 year curve will invert rather quickly: within the next few months. What happens next to the U.S. stock market (historically) after the 10 year – 2 year curve becomes inverted for the first time in each economic expansion?
Here’s what happens next to the S&P 500 after the 10 year – 2 year yield curve inverts for the first time in each economic expansion.
Here’s another way to visualize this data.
Let’s look at the historical cases in detail.
December 27, 2005
The S&P rallied for another 2 years before it began a bear market.
May 26, 1998
The S&P rallied for another 2 months before it began a “big correction”.
December 13, 1988
The S&P rallied for another 1.5 years before it began a “big correction”.
September 12, 1980
The S&P rallied for another 2 months before it began a “big correction”.
August 17, 1978
The S&P rallied for another 1.5 years before it began a “big correction”.
Conclusion
As you can see, the U.S. stock market usually keeps going up after the 10 year – 2 year yield curve becomes inverted. This is because the 10 year – 2 year yield curve inverts TOO EARLY. It gives a bearish signal too early.
The 10 year – 3 month yield curve is still at 0.8%, which means that it won’t be inverted in the next few months.
