Don’t fret too much about the yield curve inversion, says JPMorgan Chase & Co. Stocks can still climb to new records.
Equities around the world plunged last week after the key U.S. 2-year and 10-year yield curve briefly flipped for the first time since 2007, spurring fears of an economic downturn. But this correction is likely to be short-lived and U.S. stocks will recover as soon as early September, say JPMorgan strategists led by Mislav Matejka, as stimulus from major central banks outweighs worries about a slowdown.
Even if the well-known harbinger of recession proves correct, JPMorgan says investors should still have time to reap further gains before the mood sours, since past yield curve inversions have preceded economic downturns by as long as 17 months on average and stock market peaks by about 11 months. The return in equities averaged about 10% in the 12 months following a flat yield curve, according to JPMorgan.
“We continue to think that, post the August correction, equities will make new all-time highs into the first half of next year,” JPMorgan strategists, including Matejka, write in a note. “Having said that, this development nevertheless increases the chances of a potential peak of the market for this cycle in summer 2020, as we previously outlined in our work.”
The analysts also point out that in the past, the curve inversion was a sign of real policy rates becoming too high, of a deteriorating labor market and tighter lending conditions. However, the current situation is the opposite, with real rates barely exceeding zero.
“The curve inversion might be more an indicator of extreme market nervousness at present, of increasing central banks action, skewed bond ownership, and of global search for yield, rather than a sure sign that the U.S. is about to enter a recession,” according to the JPMorgan strategists.
This article was provided by Bloomberg News.