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Yield-Curve Inversion Isn't Threatening Stocks Yet -- Here's When It Will

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Yes, U.S. stocks have already fallen considerably after the yield curve inverted. But it is only a problem for stocks if it stays that way. 

The S&P 500 is down almost 2% from Thursday afternoon. The three-month and 10-year treasury yields have inverted, with the 10-year under 2.45%, and the three-month above that.

Essentially, bond investors have rushed into longer-dated treasuries, pushing the price up and yield down, causing the longer-dated yield to dip below the shorter-dated yield. This reflects weak confidence in long-term economic growth, and ultimately weak inflation. 

But how long does the yield-curve inversion need to be in place for the stock market to see a substantial drop, or even a correction? 

"I would say if we got two to three months into a curve inversion, that, to me, would be a troubling sign," said Mark Heppenstall, chief investment officer at Penn Mutual Asset Management. "And typically, the lead time between when a curve inversion starts and ultimately the economy starts to slow, is 6 months to 24 months." 

Heppenstall mentioned that while the duration of the inversion isn't yet cause for huge concern for stock investors, the San Francisco Federal Reserve published a study saying that it is precisely the three-month and 10-year yields that all investors should eye when considering a curve inversion as a grave indicator of economic weakness, and therefore equity market weakness. 

Related. On Inverted Yield Curves, Interest Rates, Recession and Fed Policy.

Related. When 3-Month and 10-Year Yields Invert, How Should Investors React?

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