Back in April 2018 we posted our first article on the inverted yield curve and the correlations with the 2001 and 2008 recessions. Based upon the rate of decent in the 10-YR to 2-YR spread, a rate-curve inversion was graphically predicted to likely occur late this year. Here is a more detailed progression of the lower and upper bounds for the predicted rate curve inversion date:
Date of Lower Upper
Prediction Bound Bound
Change Date Date
06/10/2015 N/A 03/20/2018
Dec 2015 10/06/2034 03/20/2018
Jan 2016 01/01/2025 03/20/2018
Feb 2016 03/24/2020 03/20/2018
Mar 2016 11/30/2019 03/20/2018
Jun 2016 07/09/2019 03/20/2018
07/08/2016 07/24/2018 03/20/2018
Nov 2016 07/24/2018 01/09/2019
Dec 2016 07/24/2018 08/29/2019
01/26/2017 07/24/2018 01/03/2020
As you may note, the upper and lower bound dates contradicted each other until November of 2016. Since July 8, 2016, the predicted lower bound (early) date has been stable at mid-2018. Since January 26, 2017 the predicted upper bound (late) date has been stable at early-2020.
Looking more closely at the recent 2-year trend, the Most Probable Inversion Date was calculated to be March 14, 2019. The chart below shows the linear regression of the recent 2-year trend:
The good news is that the S&P500 will likely peak some time after the rate curve inverts. Using the 10-YR to 2-YR spread, this lag time ranged between 6 and 16 months for the 2001 and 2008 recessions, respectively. Based upon our observations, this difference in lag time between the rate curve inversion and the market top appears to be related to the depth of the rate curve inversion.
DTRS will continue to follow the progression of the yield curve trends and likely publish updated projections as they become available.
With the Fed actively raising interest rates and continuing to flattening the rate curve, be watchful of the yield curve as we wrap-up 2018. If the curve inverts, start planning your market exit strategy.