Everyone's freaking out about a so-called yield curve inversion, but stocks do just fine when that happens

Key Points
  • Stocks rise on average by 15 to 16 percent after the yield curve inverts, Jonathan Golub, chief U.S. equity strategist at Credit Suisse, says in a note to clients.
  • Historically, such events have signaled a recession.
  • Last week, the spread between the 10-year Treasury note yield and the two-year rate hit 24.5 basis points, its lowest since 2007.
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Fear not an inverted yield curve, stock investors. Equities tend to do just fine after the yield curve goes upside down, according to Credit Suisse.

Jonathan Golub, the bank's chief U.S. equity strategist, said in a note to clients that stocks rise on average of 15 percent to 16 percent in the 18 months after shorter-term Treasurys start yielding more than their longer-term counterparts.

Investors have been freaking out about the possibility of an inversion because, historically, such events have signaled a recession is in the foreseeable future. As Golub points out, every yield curve inversion over the past 50 years has been followed by a recession.

Last week, the spread between the 10-year Treasury note yield and the two-year rate hit 24.5 basis points (0.245 percentage point), its lowest since 2007. The spread was around 32 basis points on Monday.

However, “the lead time is extremely inconsistent, with a recession following anywhere from 14-34 months after the curve goes upside down,” he notes. Golub also says the spread’s tightening is a reflection of “divergent global economics" with longer-dated Treasury yields tethered to the German bund and other sovereign bonds.

Also, Federal Reserve's moves to hike short-term rates "reflects domestic strength and a tight labor market,” rather than a looming recession or worrisome inflation.

“Historically, an inverted yield curve has been accompanied by a variety of other ominous economic signals including layoffs and credit deterioration,” he said, noting that job creation, corporate earnings quality and the housing market are still strong. “There is no historical precedent when yield curve inversion, in the absence of corroboration from other signals, has led to a downturn.”

The is up nearly 5 percent for the year through Friday’s close.