The last time the yield curve inverted, they promised us a recession, maybe even a market crash if we're lucky!
Instead all we got was a historic bull market, including back to back years of 20%+ returns in the S&P500.
You see, this is what happened AFTER the yield curve inverted.
And why is this such a big deal?
There's this really hilarious function in the way humans think. A large population of economists and wall street sell side analysts get very sad when the yield of one bond pays more than the yield of another.
It's this really weird thing in the markets that gets these folks very afraid, and so they want their customers to be afraid too.
And if these economists and sell side analysts do their jobs right, as they have for many years, they're loyal following of sheep will be sure to sell their stocks and run to cash just before a historic bull market.
And that, of course, is exactly what happened over the past couple of years, as investors piled into more money market funds than any other time in history, only for that to be one of the worst possible decisions any investor could have made at any point since the yield curve inverted back in 2022.
Mission accomplished economists! Thank you for your contributions.
Moving right along, now that we're over 2 years into a bull market, and this yield curve inversion that they were trying to scare you about is no longer inverted, investors unanimously feel that the yield curve will now steepen.
In other words, while stocks rallied with the shorter-end of the curve paying more than the longer end, all the investors are thinking that this curve will return to steepening, where the longer-term bonds will now be paying more and more yield than the shorter duration bonds.
In fact, we've never seen higher expectations for a steepening yield curve.
Here's the chart from BofA's Fund Manager Survey showing exactly that:
How much do you want to bet that the yield curve is NOT going to steepen?
If they're all positioned for that, is it the bet you want to make?
Not me!
Look at how hilarious it is that the yield curve is about to invert once again.
The U.S. 2-year yield and the U.S. 10-year yield are both paying 3.9% right now.
When 2s are paying more than 10s, that means the yield curve is inverted again, and all those economists and sell side analysts can write their reports that will scare all their customers out of the stock market.
It will be great.
Here's what that looks like:
So what do we do about it?
What does this mean for equities overall?
How does this impact the sector rotation we've been seeing.
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