Chill out, an inverted yield curve doesn't necessarily mean stocks are going to be blown to pieces.
While some on Wall Street have freaked out lately over the flat yield curve and and its potential to invert -- which in the past has been a recession indicator -- the data suggests investors should remain steadfast amidst the hysteria. Said data comes from one of Wall Street's top strategists, Tony Dwyer over at Canaccord Genuity. Dwyer will be a featured panelist at TheStreet's May 5 "Investor Boot-Camp" conference. You can quickly register for the conference here.
But here is a sneak peak at some of Dwyer's top thoughts on the yield curve ahead of the conference:
"We entered 2018, with the idea there would be periods of increased volatility as a result of historically high market and economic optimism coupled with historically low Fed policy fear as measured by the Monetary Policy Uncertainty Index. We see no reason to change our view that as long as an inversion of the yield curve has not shut down credit, and the direction of EPS is going up, we want to use any weakness as an intermediate-term opportunity to add exposure for a move to 3,100 in S&P 500
, concentrated in the Financials, Info Tech and Industrial Sectors.
Yield curve shows S&P 500 peak and recession remain years away. It has been nine years since both the economic recovery and bull market began. The length of the recovery always begs the question; "How much longer can this go on?" If any cycle has ever proven there needs to be an inversion of the yield curve to generate a recession given the many headwinds investors have faced, it is this one. In fact, the San Francisco Federal Reserve recently did a study that found the best indicator for recession is still an inversion of the U.S. Treasury Yield Curve. The current spread between the 2-year and 10-year U.S. Treasury yield is 61 basis points. Clearly, the most recent 12% "shock drop" shows there can be nasty corrections along the way, but history shows (1) "the" peak in the SPX is a median 18.5 months after an inversion, and (2) a recession happens 19 months following the initial inversion (Figure 1). Using the last three cycles that are much more similar to current, the median months until "the" S&P 500 peak and recession were 22 and 24 months, respectively."
Follow Dwyer on Twitter @dwyerstrategy.