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We just witnessed a yield curve inversion. And now everyone’s freaking out.
Source: TierneyMJ / Shutterstock
The talking heads on mainstream media would have you believe an inverted yield curve is a death-kiss for the stock market. But this is the most bullish thing that could happen to stocks right now. Thanks partly to this inversion, we think our Innovation Investor portfolio will see a huge “melt-up” over the coming months.
The story here is simple.
Last night, the 10-year Treasury yield slipped below the 2-year for the first time since 2019. That matters because the yield curve should slope upward. When it slopes downward, we almost always get a recession.
Seriously; the rare phenomenon of the 10-2 spread going negative happens about once a decade. And it has always been followed by a recession.
Source: YCharts
That spread just went negative last night. Naturally, folks are freaking out about an impending recession.
But what that cursory analysis misunderstands is that yield curve inversions are infamously early in predicting recessions. That is, they tend to happen about 20 months before the stock market hits a peak. And during those 20 months, Wall Street tends to party like there’s no tomorrow.
The past three yield curve inversions were followed by gains of greater than 20% during that stretch.
Basically, yield curve inversions tend to lead to massive stock market melt-ups before they lead to recessions. Interestingly, this rally tends to be especially large for growth and tech stocks.
History shows what comes next, then, could be a stretch of huge gains for the stock market. And we could see a stretch of even bigger gains for tech stocks.
Here’s a deeper look.
The 1988 Yield Curve Inversion
As a case study, let’s look at the last four yield curve inversions. All displayed an eerily similar trading pattern.
The first notable one happened in December 1988.
Going into this inversion, tech stocks struggled. The Nasdaq dropped 2.5% in the three months leading up to this shift. Once the yield curve inverted, however, it kickstarted a massive rally in tech stocks. Within three months, the Nasdaq was up 9%. Within six months, it was up 20%. And within 12 months, it was up 21%.
Source: InvestorPlace
In 1988, then, we see that tech stocks struggled before the yield curve inversion. Then they soared for months after the inversion.
Interesting…
The 1998 Inversion
The yield curve inverted again in May 1998. At that point in time, the 10-year yield slipped below the 2-year for the first time in a decade.
Going into this inversion, we see that tech stocks again struggled. The Nasdaq traded flat for three months heading into the yield curve inversion. Then, once the yield curve shifted, tech stocks started booming. Within six months, they were up 13%. And a year later, they were up 37%.
Source: InvestorPlace
In other words, as in 1988, tech stocks struggled before the yield curve inversion of 1998. And then they soared for months afterward.
Interesting…
The 2006 Yield Curve Inversion
Let’s fast-forward six years. The yield curve again inverts in January 2006.
Like previous instances, tech stocks struggled for gains ahead of this inversion. But once the shift happened, tech stocks started roaring higher.
Source: InvestorPlace
Yet again, we see that ahead of the 2006 yield curve inversion, tech stocks struggled. And then they soared for months after.
Very interesting…
The 2019 Inversion
The most recent yield curve inversion happened in August 2019.
Tech stocks — which had been booming all year long — struggled in the months leading up to this inversion. Afterward, though, they started booming again. Three months later, the Nasdaq was up 11%. A year later, it was up nearly 50%.
Source: InvestorPlace
Once more, we see that a yield curve inversion served as a catalyst for tech stocks to go from “struggling” to “soaring.”
At this point, the findings here are a bit more than just interesting…
The Final Word
History tends to repeat itself.
In 1988 and 1998, tech stocks struggled before a 10-2 inversion, then soared for months. In 2006 and 2019, tech stocks struggled before a 10-2 inversion, then soared for months.
I sound like a broken record, right?
Well, here we are in 2022. And tech stocks are struggling while the 10-2 yield curve just inverted.
It’s clear what comes next: a huge tech stock rally.
Philosophically, this makes a ton of sense. You must understand that markets are forward-looking. They price things in before they happen, so markets anticipate the effect of a yield curve inversion before it happens. That causes stocks to move lower. Then, once the yield curve inverts and there’s no recession happening, investors breathe a sigh of relief. And they proceed to pile back into stocks.
It happens every time. This time is not different.
History is repeating itself, folks. This means that following yesterday’s yield curve inversion, tech stocks are due for a massive melt-up over the coming 12 months.
That’s why, in our flagship investment research advisory Innovation Investor, we are positioning our portfolio to capitalize on this huge pop.
Specifically, not too long ago, we issued an all-in Buy Alert on a tiny tech stock. We think it’s due for 5X or greater gains over the next 12 months alone.
This stock trades for less than $5 today. Yet it’s at the epicenter of one of the most transformative technological revolutions of our generation, with a ground-breaking platform that could truly change the world as we know it.
It’s a stock that you simply need to hear about today — before the tech stock breakout truly gets underway.
On the date of publication, Luke Lango did not have (either directly or indirectly) any positions in the securities mentioned in this article.
The post The Yield Curve Inversion Means It’s Time for a Tech Stock Breakout! 📈 appeared first on InvestorPlace.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
