- It typically takes nearly two years for a recession to occur after the bond market's signal, leaving investors room to still reap gains from the stock market, according to Tony Dwyer, analyst at Canaccord Genuity.
- "A curve inversion is an intermediate-term buy signal," Dwyer says.
The bond market just flashed its biggest recession signal ever, but one strategist said it's time to buy stocks.
A key part of the bond market inverted Wednesday when the yield of the 2-year Treasury rose above that of the 10-year Treasury, a phenomenon that for half a century has accurately signaled coming recessions. However, it typically takes nearly two years for a recession to occur after the yield curve inversion, leaving investors room to still reap gains from the stock market, according to Tony Dwyer, analyst at Canaccord Genuity.
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"A curve inversion is an intermediate-term buy signal," Dwyer said in a note to clients on Wednesday. "The initial inversion of the 2-/10-year UST yield curve works with a lag ... Our still-positive core fundamental thesis continues to suggest any weakness should prove limited and temporary and provide a more attractive entry point for a move toward our 2020 target of 3,350."
The S&P 500 has gained 21% on average in the two years before a recession, the strategist pointed out. Furthermore, in the last three cycles which are the most similar to the current environment, the S&P 500 rose 34% on average before the economy reached its peak and a recession hit about 25 months after the yield curve inversion, Dwyer said.
The yield on the benchmark 10-year Treasury note broke below the 2-year rate early Wednesday, sending stocks plunging. The last inversion of this part of the yield curve was in December 2005, two years before a recession brought on by the financial meltdown.
Investors, worried about the state of the economy, rushed to long-term safe haven assets, pushing the yield on the benchmark 30-year Treasury bond to a new record low on Wednesday.
"The drop in global interest rates that has come with the weaker global data should cause a rebound in economic activity as we head toward year end," Dwyer said. "There is no sign in our credit metrics that indicates a shutdown in money availability that would make the lower rates less impactful for forward growth expectations."