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The S&P 500 Tends to Rise After an Inverted Yield Curve -- Update

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08/14/2019 | 05:36pm EDT

By Sara Schaefer Munoz

Stocks closed down sharply Wednesday, following a worrisome signal in the Treasury market that spooked investors.

Yet they should take heart: If history is a guide, the S&P 500 actually tends to gain following such a signal, called an inverted yield curve.

On Wednesday, the yield on the U.S. 30-year Treasury bond touched 2.018%, while yields on the 10-year Treasury note briefly fell below two-year yields for the first time since 2007. This kind of inversion between short- and long-term yields is viewed by many as a strong signal that a recession is likely in the future. The S&P 500 closed down 2.9%.

Yet the yield curve is just one signal of economic gloom, and economists can't pinpoint when a recession will follow.

The S&P 500 has weathered such inverted moves before. According to Dow Jones Market Data, the index has gained an average of 2.53% three months after the yield curve first inverted between 1978 and 2005. Six months after the start of these inversions, the broad stock index's gains were an average of 4.87%. A year afterward, the index gained an average of 13.48%. Two and three years out, the S&P rose an average of 14.73% and 16.41%, respectively.

Three months after yields inverted on Dec. 20, 2005, the S&P gained 4.16%. Six months afterward, it was up 1.76%, and a year on it increased 13.62%. Two years later, it was up 18.44%. Three years on, it dropped 28.65% amid the financial crisis.

Sometimes, the S&P 500 has dipped in the short term. When the curve inverted on May 26, 1998, the index was down 0.90% three months later, but six months afterward was up 8.49%. It also fell three and six months after the start of the inversion on Aug. 17, 1978, but a year later was up 3.06%.

The biggest S&P 500 increase three years following the start of an inverted yield curve was tied to a Dec. 9, 1988 inversion. The S&P continued to post gains, and three years later ended 36.54% higher.

Write to Sara Schaefer Munoz at Sara.Munoz@wsj.com

Stocks mentioned in the article
ChangeLast1st jan.
DJ INDUSTRIAL 1.20% 25886.01 Delayed Quote.10.97%
NASDAQ 100 1.59% 7604.108768 Delayed Quote.20.13%
NASDAQ COMP. 1.67% 7895.993811 Delayed Quote.19.00%
S&P 500 1.44% 2888.68 Delayed Quote.15.23%
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