Inversion talk (remember a year or so ago?)

December 23, 2020 | Jeremy Goldfarb


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A little over a year ago, before all this "pandemic stuff" began, you may have heard noises about all time highs, recession indicators, and yield curve inversions. In fact, I put out a piece last year on yield curve inversion, and how it can be a leading indicator to recessions, market volatility, and economic stress. One of the points I made in another post was that markets do not simply die of old age. Fundamentals degrade, valuations get stretched, or a shock is delivered to the market in some way that derails any additional progress on growth (albeit temporarily)

 

The chart below points to something I found very interesting. Most people in the investment know that yield curve inversion = no bueno for the markets. It exhibit price/risk imbalances that historically have been early indicators of recession. In fact, the US 2year/10year yield curve, when inverted, has been an excellent predictor of recessions (7/8 gets you into any hall of fame on the first ballot). My point though is this.....

 

With the onset of the pandemic, it was ultimately shock that tilted economies into recession, and markets into bear and depressed territories. But were we headed there anyway? I find myself asking whether valuations were getting stretched, fundamentals were degrading, and economies were stalling. Looking at the chart below, one could certainly make that argument. I guess we'll never know. 

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