This post was authored by Salvatore M. Capizzi, Dunham's Chief Sales & Marketing Officer. If you have questions concerning today's topic, please call us at (858) 964 - 0500. Hold us to higher standards.

Is an inverted yield curve a reason to scrap equities from your portfolio?

I can say most definitively that it depends.

Where is your focus?

If you have short-term objectives, it might be prudent to examine your equity position. If you are a long-term investor, you might want to explore the research Dunham’s Senior Analyst, Jason Greer, conducted on inverted yield curves.

Inverted yield curves may not be your canary for the equity market

While historically, inverted yield curves have proceeded every recession for the last 60 years, a recession has not followed every inverted yield curve ⁽¹⁾. This has been a widely publicized fact. However, Dunham’s research found that abandoning equities may cost long-term investors what we consider significant returns even when a recession follows an inverted yield.

Inverted Yield Curves, Recessions, and Double-Digit Equity Returns?

It is essential to understand that past performance never indicates future results, and no two markets are exactly the same. The research conducted by Dunham shows, that for the investor with a long-time horizon, an inverted yield curve may not be the bad omen it has been characterized as.

We analyzed the last nine inverted yield curves, eight of which a recession followed. We examined S&P 500 total returns 18 months, three years, five years, and ten years after an inversion begins. We measured when the 3-month and 10-year treasuries inverted and the total return of the S&P 500 that ensued.

S&P 500 Total Return from Start of an Inversion

Source: Dunham & Associates Investment Counsel, Inc and Bloomberg, July 2022 Returns annualized

The worst period is 4/5/2000, which coincides with what some call the lost decade for equities. These ten years include the technology bubble burst’s negative market for the S&P 500 in 2000, 2001, and 2002, and the financial crisis of 2007, 2008, and the first quarter of 2009.

S&P 500 Total Return from Maximum Inversion

When we examined the total return of the S&P 500 from the point that the inversion hit its maximum spread, we found what we believed were similar strong results.

Source: Dunham & Associates Investment Counsel, Inc and Bloomberg, July 2022 Returns shown are annualized

S&P 500 Total Return From End of Inversion

Finally, we examined the total returns of the S&P 500 when the three-year and ten-year treasury inversion ended and found relatively positive results.

Source: Dunham & Associates Investment Counsel, Inc and Bloomberg, July 2022 Returns shown are annualized

We again notice the worst period was 2/23/2001, which included the lost decade for equities and the ten years had the technology bubble burst in 2001, and 2002, and the financial crisis of 2007, 2008, and the first quarter of 2009.

When the yield curve inverts, for the long-term investor, it is sensible to proceed with caution, but the study suggests proceeding with panic may not be prudent.

(1) https://www.usatoday.com/story/money/2022/07/08/inverted-yield-curve-grows-recession-fears/10007062002/?gnt-cfr=1

Important Disclosures:

The information in this document contains general market information only, should not be considered as a comprehensive statement on any matter and should not be relied upon as such. Nor should it be relied upon in any way as a forecast or guarantee of future events regarding a particular investment or the markets in general. It should not be considered or relied upon as legal, tax or investment advice or an investment recommendation, or as a substitute for legal or tax counsel. Information is provided for informational purposes only and does not constitute a solicitation or an offer to sell, or an investment recommendation for, any specific security, strategy or investment product or service. Always consult a qualified professional or your own independent financial professional for personalized advice or investment recommendations tailored to your specific goals, individual situation, and risk tolerance.

The views expressed are those of Dunham and Associates Investment Counsel Inc. (“DAIC”) and the comments, opinions and analyses are rendered as of the publication date and may change without notice. The underlying assumptions and these views are subject to change based on market and other conditions and may differ from other views and opinions. The information provided in this material is not intended as a complete analysis of every material fact regarding any country, region or market. There is no assurance that any prediction, projection or forecast on the economy, stock market, bond market or the economic trends of the markets will be realized. The value of investments and the income from them can go down as well as up and you may not get back the full amount that you invested. Past performance is not necessarily indicative nor a guarantee of future performance. All investments involve risks, including possible loss of principal.

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The S&P 500, or the Standard & Poor’s 500, is a stock market index based on the market capitalizations of 500 large companies having common stock listed on the NYSE or NASDAQ. The S&P 500 Index components and their weightings are determined by S&P Dow Jones Indices. It differs from other U.S. stock market indices, such as the Dow Jones Industrial Average or the Nasdaq Composite index, because of its diverse constituency and weighting methodology. It is one of the most commonly followed equity indices, and many consider it one of the best representations of the U.S. stock market, and a bellwether for the U.S. economy.

Historical performance results for investment indexes and/or categories, generally do not reflect the deduction of transaction and/or custodial charges the incurrence of which would have the effect of decreasing historical performance results. Index returns assume the reinvestment of dividends and income, if any. Past performance of an index is not an indication or guarantee of future results. It is not possible to invest directly in an index.

S&P 500 Total Return:

Source: Dunham and Associates Investment Counsel, Inc. June, 2022

Returns shown are cumulative for one year or less and annualized for more than one year.

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