The inverted yield curve sets the stage for a 'last gasp rally' in stocks

Sam Ro · Contributor

Updated Wed, Aug 14, 2019, 6:46 AM

“After the initial drawdown, the S&P 500 can have a meaningful last gasp rally,” he added. “This rally has averaged 16.7% (12.4% median) with a range of 2.0% (1965) to 28.5% (1989) and lasts 6.7 months on average (2.8 median) with a range of 0.9 to 16.5 months. The 1967, 1978, 1989, and 2005 inversions saw last gasp rallies in excess of 20% on the S&P 500.”

Historically, stocks fell and then surged after yield curve inversions.

To be clear, these yield curve inversions and market swings aren’t occurring in a vacuum. In fact, the major concern is that yield curve inversions have a stellar track record of preceding economic recessions. And recessions are always bad news for stocks.

“S&P 500 corrections associated with NBER recessions average 31.7% (22.2% median) and tend to last 14-15 months (range of 1.4 to 33.0 months),” Suttmeier added.

All that said, Bank of America Merrill Lynch’s house view is that we are in the midst of a long-term secular bull market, and that any impending economic recession and market sell-off would just be a blip in much bigger bullish story.

“Recessions do occur during secular bull markets,” Suttmeier said. “The 1950-1966 bull market had three and the 1980-2000 bull market had two. The silver lining is that the S&P 500 pullbacks associated with recessions during secular bull trends are much less severe and averaged 20% (range of 13.9% to 27.1%) rather than the average 40% drawdown (range of 0.0% to 86.2%) for recession pullbacks during secular bear phases.”