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Misreading the Signs: Is Yield-Curve Inversion a False Alarm?

By Advisor Perspectives
Financial Services

The US yield curve dipped into inverted territory recently. But that’s not necessarily a bad omen for equities. There are several important warning signals—and lately the yield curve’s slope is the only one flashing red.

The curve plots the gap between long- and short-term US Treasury yields, and there’s a reason investors pay attention to it: the curve has inverted before each of the last seven recessions. But inversion isn’t a foolproof recession indicator, and as our colleagues have noted, it doesn’t always mean disaster for stock markets.

So what warning signs should investors be heeding? To build a dashboard, we analyzed scores of signals from our models to see how well they predicted large equity sell-offs—defined as a drawdown of 15% or more—dating back to 1950.

Read more at Advisor Perspectives.

Photo: Andy Maguire

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