Yield Curve Inversions, and Important Historical Context

 
Here is a succinct table with the inversion start dates and their corresponding lengths for easy posting:

AI

Here’s a detailed look at some key yield curve inversions over the past 100 years, including the dates they occurred, whether the inversion resolved before the downturn, and what happened in the stock market afterward:

1. 1929 (Great Depression)
Yield Curve Inversion Date: The yield curve inverted in early 1928.
Recession Start Date: August 1929.
Market Peak: September 1929 (Dow Jones Industrial Average).
Resolution: The inversion did not resolve before the market downturn and the Great Depression began.
Outcome: The stock market crashed in October 1929, leading to the Great Depression. The yield curve remained inverted as the recession took hold.

2. 1973-1974 (Oil Crisis Recession)
Yield Curve Inversion Date: June 1973.
Recession Start Date: November 1973.
Market Peak: January 1973.
Resolution: The yield curve inversion resolved just before the recession began.
Outcome: The stock market had already peaked before the inversion. After the recession began, the S&P 500 experienced a significant downturn, losing about 50% by late 1974.

3. 1980-1982 (Early 1980s Recession)
Yield Curve Inversion Date: September 1978.
Recession Start Date: January 1980 (first recession), followed by another recession starting in July 1981.
Market Peak: The market saw volatility, but the major peak occurred in April 1981.
Resolution: The yield curve inversion resolved in late 1979, just before the first recession.
Outcome: The market experienced volatility and downturns during the two back-to-back recessions in the early 1980s.

4. 2000 (Dot-Com Bubble)
Yield Curve Inversion Date: February 2000.
Recession Start Date: March 2001.
Market Peak: The S&P 500 peaked in March 2000.
Resolution: The inversion resolved shortly before the recession began.
Outcome: The stock market began a significant downturn in late 2000, with the tech-heavy Nasdaq losing nearly 80% of its value by October 2002.

5. 2007 (Global Financial Crisis)
Yield Curve Inversion Date: July 2006.
Recession Start Date: December 2007.
Market Peak: October 2007.
Resolution: The inversion resolved in mid-2007, just before the recession began.
Outcome: The S&P 500 continued to rise until October 2007, but then entered a severe bear market, culminating in the global financial crisis and a 50% drop by March 2009.

6. 2023-2024 (Potential Future Recession)
Yield Curve Inversion Date: July 2022.
Current Status: As of August 2024, the yield curve has been inverted for 750 days.
Market Peak: The market remains volatile, with concerns about a future recession.
Resolution: The inversion has not yet resolved.
Outcome: To be determined based on future economic developments.

Summary of Patterns:
Timing: In most historical instances, the yield curve inversion resolved just before or as the recession began, though the market often continued to climb after the inversion, sometimes reaching new peaks before the downturn.
Market Impact: Historically, the market has tended to peak either shortly after the yield curve inverts or just before the inversion resolves, followed by significant downturns as the recession begins.
Current Situation: Given the current prolonged inversion, there’s heightened concern that a recession could follow, but the exact timing and market behavior remain uncertain.
This analysis underscores the importance of monitoring both the inversion and other economic indicators, as relying solely on the inversion could lead to missed opportunities or premature risk avoidance.

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The chart you've shared appears to focus on the inverted yield curve between the 10-year and 2-year U.S. Treasury yields. This inversion, where shorter-term interest rates exceed longer-term rates, is a significant economic indicator often associated with predicting recessions.

Key Points from the Chart:
Inverted Yield Curve (IYC) as a Recession Indicator:

The chart highlights the historical instances where the yield curve has inverted, typically signaling an upcoming recession. For example, it shows that the yield curve inverted in 1989 before the 1990 recession, in early 2000 before the 2001 recession, and again in 2006 before the 2008 financial crisis.
750-Day Inversion:

The chart notes that as of July 24, 2024, the yield curve has been inverted for 750 days, marking a prolonged period of inversion. Historically, such a lengthy duration is unusual and suggests a significant economic event may be on the horizon.
Correlation with S&P 500 (SPX):

The S&P 500 index is shown in gray, with the chart indicating that past inversions have often preceded significant market downturns. The correlation implies that the stock market could be at risk following a prolonged yield curve inversion.
Past Recession Indicators:

The chart clearly outlines past recessions shaded in red, showing the timing between the yield curve inversion and the subsequent market reaction or recession. This correlation is used to argue the predictive power of the yield curve.
Discussion on the Current Situation:
The current inversion lasting 750 days is historically long, which could indicate that the market and economy are in an unusual situation. Typically, the longer the inversion lasts, the more severe the recession tends to be. However, the exact timing and impact are difficult to predict.

Additionally, the chart suggests that the inversion tends to resolve before the market tops, implying that while the market may still be strong, caution is warranted.

Given the current economic environment, which may include high inflation, rising interest rates, and geopolitical uncertainties, the yield curve inversion serves as a warning signal to investors and policymakers.

Implications for Investors:
Investors might consider adopting a more defensive investment strategy, including reducing exposure to high-risk assets and increasing allocations to bonds or other safer investments.

Monitoring Federal Reserve actions, as well as broader economic indicators like employment rates and consumer spending, can provide further insight into when the inversion might resolve and whether a recession is imminent.

This yield curve inversion is a critical tool for forecasting economic downturns, and the current situation suggests heightened economic risks. Investors should stay informed and consider adjusting their portfolios accordingly.





You said:
so one could assume that it is safe to be long until the inversion resolves?   how haws that played out over the last 100 years
ChatGPT said:
ChatGPT
The notion that it might be "safe to be long" (i.e., holding a long position in the stock market) until the yield curve inversion resolves has been a topic of significant debate among investors and economists. Historically, yield curve inversions have been reliable indicators of upcoming recessions, but the timing between the inversion and the actual market downturn can vary widely.

Historical Analysis of Yield Curve Inversions:
Timing Between Inversion and Recession:

On average, recessions have started about 12 to 24 months after the yield curve inverts. This means that while the inversion is a reliable recession indicator, the stock market can still perform well for a period after the inversion before a downturn begins.
Market Performance Post-Inversion:

In many cases, the stock market has continued to rise even after the yield curve inverts, often reaching new highs before the eventual downturn. For instance:
1989 Inversion: The S&P 500 continued to rise for several months after the inversion before the recession in 1990.
2000 Inversion: The market peaked shortly after the yield curve inversion in early 2000, but then experienced a significant downturn during the dot-com bust.
2006 Inversion: The S&P 500 continued to climb for about a year after the yield curve inverted before the 2008 financial crisis.
The Longest Inversions and Market Peaks:

When the inversion period is prolonged, as in the current situation (750 days as of July 2024), it can complicate predictions. A prolonged inversion might suggest that the economy is under significant stress, and while the market might continue to rise, the risks of a sharper downturn increase.
How It Has Played Out Over the Last 100 Years:
1929: Before the Great Depression, the yield curve inverted in 1928, and the market continued to climb until the crash in 1929.
1973-74: The yield curve inverted in 1973, and the stock market continued to perform for several months before entering a severe bear market.
1980-82: The yield curve inversion in 1980 preceded a recession, but the market saw gains before the downturn.
2000: The yield curve inverted in early 2000, and the market peaked in March 2000 before the dot-com bubble burst.
2007: The yield curve inverted in 2006, and the market continued to reach new highs until late 2007 before the financial crisis.
Implications for Current Investors:
Given this history, the key takeaway is that while it might seem "safe" to be long during the initial phase of a yield curve inversion, caution is warranted as the inversion persists. The stock market can continue to rise after an inversion, but the risks of a significant downturn increase as the inversion prolongs. Therefore, investors should be vigilant and consider taking a more defensive stance as the inversion period extends, particularly if other economic indicators begin to show signs of weakness.

It's also important to note that every economic cycle is different, and past performance does not guarantee future results. While history provides valuable insights, market conditions, investor sentiment, and macroeconomic factors should also be considered in making investment decisions.





You said:
put more exact dates on those inversions, and whether the inversion actually resolved before the downturn
ChatGPT said:
ChatGPT
Here’s a detailed look at some key yield curve inversions over the past 100 years, including the dates they occurred, whether the inversion resolved before the downturn, and what happened in the stock market afterward:

1. 1929 (Great Depression)
Yield Curve Inversion Date: The yield curve inverted in early 1928.
Recession Start Date: August 1929.
Market Peak: September 1929 (Dow Jones Industrial Average).
Resolution: The inversion did not resolve before the market downturn and the Great Depression began.
Outcome: The stock market crashed in October 1929, leading to the Great Depression. The yield curve remained inverted as the recession took hold.

2. 1973-1974 (Oil Crisis Recession)
Yield Curve Inversion Date: June 1973.
Recession Start Date: November 1973.
Market Peak: January 1973.
Resolution: The yield curve inversion resolved just before the recession began.
Outcome: The stock market had already peaked before the inversion. After the recession began, the S&P 500 experienced a significant downturn, losing about 50% by late 1974.

3. 1980-1982 (Early 1980s Recession)
Yield Curve Inversion Date: September 1978.
Recession Start Date: January 1980 (first recession), followed by another recession starting in July 1981.
Market Peak: The market saw volatility, but the major peak occurred in April 1981.
Resolution: The yield curve inversion resolved in late 1979, just before the first recession.
Outcome: The market experienced volatility and downturns during the two back-to-back recessions in the early 1980s.

4. 2000 (Dot-Com Bubble)
Yield Curve Inversion Date: February 2000.
Recession Start Date: March 2001.
Market Peak: The S&P 500 peaked in March 2000.
Resolution: The inversion resolved shortly before the recession began.
Outcome: The stock market began a significant downturn in late 2000, with the tech-heavy Nasdaq losing nearly 80% of its value by October 2002.

5. 2007 (Global Financial Crisis)
Yield Curve Inversion Date: July 2006.
Recession Start Date: December 2007.
Market Peak: October 2007.
Resolution: The inversion resolved in mid-2007, just before the recession began.
Outcome: The S&P 500 continued to rise until October 2007, but then entered a severe bear market, culminating in the global financial crisis and a 50% drop by March 2009.

6. 2023-2024 (Potential Future Recession)
Yield Curve Inversion Date: July 2022.
Current Status: As of August 2024, the yield curve has been inverted for 750 days.
Market Peak: The market remains volatile, with concerns about a future recession.
Resolution: The inversion has not yet resolved.
Outcome: To be determined based on future economic developments.

Summary of Patterns:
Timing: In most historical instances, the yield curve inversion resolved just before or as the recession began, though the market often continued to climb after the inversion, sometimes reaching new peaks before the downturn.
Market Impact: Historically, the market has tended to peak either shortly after the yield curve inverts or just before the inversion resolves, followed by significant downturns as the recession begins.
Current Situation: Given the current prolonged inversion, there’s heightened concern that a recession could follow, but the exact timing and market behavior remain uncertain.
This analysis underscores the importance of monitoring both the inversion and other economic indicators, as relying solely on the inversion could lead to missed opportunities or premature risk avoidance.