How Concerned Should We Be About The Yield Curve?

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Includes: DDM, DIA, DOG, DXD, EEH, EPS, EQL, FEX, FWDD, HUSV, IVV, IWL, IWM, JHML, JKD, OTPIX, PSQ, QID, QLD, QQEW, QQQ, QQQE, QQXT, RSP, RWM, RYARX, RYRSX, SCHX, SDOW, SDS, SFLA, SH, SMLL, SPDN, SPLX, SPUU, SPXE, SPXL, SPXN, SPXS, SPXT, SPXU, SPXV, SPY, SQQQ, SRTY, SSO, SYE, TNA, TQQQ, TWM, TZA, UDOW, UDPIX, UPRO, URTY, UWM, VFINX, VOO, VTI, VTWO, VV
by: Chris Ciovacco

Summary

Warnings abound regarding a flattening yield curve.

Does the latest economic data align with the imminent recession and bear market theory?

Yield curve Q & A and historical facts.

The Yield Curve Hype

According to numerous articles written in the last six months, a flattening yield curve nearing the zero boundary is a major red flag for stocks (SPY) and the economy.

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Data This Week Looks Strong

Monday's ISM Manufacturing data landed in a "strong and growing economy" range and nowhere near an "imminent recession" range. From MarketWatch:

The Institute for Supply Management said its manufacturing index rose to 60.2% last month from 58.7% in May. That matches the second highest level of the current economic expansion that began in mid-2009. In February the index hit a 14-year high. Readings over 50% indicate more companies are expanding instead of shrinking.

During the holiday-abbreviated session Tuesday, the latest read on factory orders was released. From MarketWatch:

U.S. factory orders rose 0.4% in May, led by an increase in demand for machinery and military wares. Economists polled by MarketWatch has forecast no change. The originally reported 0.8% decline in factory orders in April, meanwhile, was revised down to show a 0.4% drop, the government said Tuesday.

The Misunderstood Yield Curve

This week's video takes a detailed and factual look at the yield curve, helping us address the following questions:

  • Is it possible for really good things to happen in the stock market (VTI) after a period that features a flattening yield curve?
  • If the yield curve continues to fall, should we sprint for the nearest exit?
  • Is there any historical difference between "the yield curve is about to invert" and "the yield curve has already inverted?"
  • In the 2000 and 2007 cases, how long did it take for the major stock market (VOO) peak to arrive after the first sign of yield curve inversion?
  • In the 2000 and 2007 cases, how much did the S&P 500 gain between the first sign of yield curve inversion and the major market peak?

Disclosure: I am/we are long SOY, VOO, VTI.