JPM: stock market usually gives high returns after inversion of the yield curve

One of Wall Street’s top quantitative analysts was the latest to weigh in on the inversion of the yield curve, reminding investors Tuesday that the phenomenon, while viewed as a reliable recession indicator, also tends to signal a period of strong returns for the stock market.

“Historically, equity markets tended to produce some of the strongest returns in the months and quarters following an inversion. Only after [around] 30 months does the S&P 500 return drop below average,” said Marko Kolanovic, global head of macro quantitative and derivatives research at J.P. Morgan, in a Tuesday note (see chart below).

Stocks sold off sharply on Friday after the yield curve inverted. Or more specifically, a sensitive measure of the yield curve — the spread between the yield on the 3-month Treasury bill and the 10-year Treasury note  — turned negative.

The yield curve typically slopes upward. An inverted curve is often viewed as a sign investors see slower growth ahead, warranting lower rates. Moreover, inversions of the yield curve have proven to be a reliable recession indicator, preceding contractions by a year or more. Researchers at the San Francisco Fed say the 3-month/10-year curve is the most reliable indicator, while Cleveland Fed researchers note that inversions of that measure have preceded the past seven recessions with only two false positives — an inversion in late 1966 and a very flat curve in late 1998.

Stock market often produces strongest returns after yield curve inverts: JPM’s Kolanovic, MarketWatch, Mar 27