Now that the key yield curve has inverted, here's what typically happens to stocks next

Published Thu, Mar 31 20225:21 PM EDTUpdated Thu, Mar 31 20228:23 PM EDT

A key part of the so-called yield curve just inverted for the first time since the pandemic crisis, sending an alarming recession signal. However, for investors wondering what it means for the market, the inversion is not necessarily a death knell for stocks. The 2-year Treasury yield rose above the 10-year Treasury rate on Thursday, a phenomenon that for half a century has accurately signaled coming recessions. Still, for equity investors, the future is not all that gloomy as the market typically could see gains in the near term. There have been seven incidents of the yield-curve inversion since 1976, and the S & P 500 has on average gained about 13% one year after the initial occurrence, according to data from Bespoke Investment Group. The S & P 500 has also seen modest gains on average in the one-month, three-month and six-month periods after an inversion, the data said. To be sure, the market could see a correction of 10% or more within the one-year period, history shows. But it tends to recover the losses eventually. Meanwhile, while the yield-curve inversion has been a reliable recession predictor, it typically takes nearly two years for an economic downturn to occur, which leaves investors room to still reap gains from the stock market, according to Tony Dwyer, analyst at Canaccord Genuity. Dwyer's data shows the S & P 500 typically peaks 18 months after an inversion and a recession typically starts shortly after that. "All of this Yield Curve and recession talk is within the context of a ground war in Europe, spiking inflation, and global growth uncertainty," Dwyer said in a recent note. "We continue to believe that despite the many headwinds, the excess liquidity and proper Yield Curve point to a positive growth environment, albeit a slower one." One of Wall Street's top strategists, Marko Kolanovic, also believes that the stock market has room to run even after the yield curve inverts. It takes around a year for stocks to peak after the point of curve inversion, and the S & P 500 usually trades higher by 15% during that period, according to Kolanovic, JPMorgan's chief global markets strategist. "The clock has not started ticking yet, and the upcoming QT could matter for the timing," Kolanovic said in a note. "Not all the yield curve signals are moving closer and closer to the recession trade." — CNBC's Maggie Fitzgerald contributed reporting.

A trader works on the floor of the New York Stock Exchange (NYSE) in New York.

Brendan McDermid | Reuters