Is the Bond Market Signaling a Recession?

• The bond market has once again captured headlines, with concerns focused on a potential inversion in the yield curve. An inverted yield curve, defined broadly as short-term bonds paying more than long-term bonds, can signal that economic growth may be slowing after having peaked, but doesn’t necessarily mean a recession or market crash is imminent.
• Most recessions in modern history have been preceded by an inverted yield curve. However, the expert who studied the forecasting ability of the yield curve cautioned that a few days of an inverted yield curve doesn’t necessarily mean the economy will head into recession. In addition, the lag times between an inversion and a subsequent recession have been long and highly variable – anywhere from a few months to more than two years. Finally, for the last five recessions, S&P 500 stocks have posted average positive returns of 13% during the post-inversion period and the start of the recession. As such, investors should be cautious and not consider an inversion as a market timing tool.

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