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When To Expect Stocks To Fall If The Yield Curve Is Still Relevant

Published Wed, 11 Sep 2019 11:06:13 -0400 on Seeking Alpha

An inverted yield curve is one of the most reliable leading indicators of an ensuing recession.
That is, when longer maturity Treasury yields such as that of 10, 20, or 30-year bonds are lower than the yields of short-term Treasury yields, this signifies the market betting that the Federal Reserve will soon lower the overnight rate. A lower overnight rate will ripple out to lower short-term rates.
It's up for debate whether an inverted yield curve still works well as a leading indicator of economic weakness ahead. Those who say it doesn't have their reasons for thinking so, but I would prefer to err on the side of the reliability of an inverted yield curve rather than argue that its relevance is obsolete. This time, in my judgment, is not actually that different, despite the perennial assumption near market peaks that it is.
I want to explore when the stock market tends to fall leading up to recessions, and when to expect a potential future recession to start based on historical occurrences of inversions.
Stock Performance Before and During Recessions
Leading up to prior recessions, when did stocks (as measured here by the S&P 500) fall?
The recession of the early 1990s was relatively mild, and stocks did not fall at all until after the recession had started. This is true also of the brief recession in 1980 as well as the recession of 1981 and 1982 (not pictured below).
Data by YCharts
Prior to the recession beginning in 2001, stocks started... Read more

Stock name Last trade   P/E Earnings/Share Dividend/Share Dividend yield
VANGUARD EXTENDED DURATION TREASURY ETF 137.28   0.0 0.00 0.00 2.29
ISHARES BARCLAYS AGGREGATE BOND FUND  
SPDR BARCLAYS CAPITAL 1-3 MONTH T-BILL ETF  
VANGUARD INTERMEDIATE-TERM BOND ETF  
VANGUARD TOTAL BOND MARKET ETF  
VANGUARD SHORT-TERM BOND ETF  

VANGUARD EXTENDED DURATION TREASURY ETF - EDV
VANGUARD EXTENDED DURATION TREASURY ETF - EDV  


Older articles featuring Vanguard Extended Duration Treasury Etf (EDV):
Yield Curve: Okay For Now
Komal Sri-Kumar: U.S. 10-Year Yields Are Going To 1%
Yield Curve Mid-September 2019 Update
Lower Yields Coming To The United States
On The Yield Curve Inversion Signaling Recession
Jump In Yields Didn't Derail Equity Rally While Sterling Rallies Ahead Of The Weekend On (Misplaced) Brexit Optimism
Low Bond Yields
This May Not Be Your Father's Inverted Yield Curve
Pay Attention To The Message The Yield Curve Is Sending
Weighing The Week Ahead: Yield Curve Inversion And The Jackson Hole Agenda

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