“The recent selloff in equities was partially the result of a near inversion of the 2-10 year U.S. Treasury Yield Curve (YC).” That was the opening line in our note from January 3, 2006 following a near 2% drop in the S&P 500 (SPX) at the end of the prior week. We went back to see if there was the same focus on the potential inversion of the yield curve in the last cycle as is currently the case. Indeed, the fears of recession were the same then as they are now – and so was our market conclusion. An inversion of the YC does predict recession, but historically it is a better buy signal than pointing to a time to get sustainably defensive.
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