Let’s revisit the yield curve inversion we saw last month.

Since the last Federal Reserve rate hike in late 2018, Treasury yields have been on a consistent slide towards their lowest point since the financial crisis in 2007. On August 14, the 2-year yield finally surpassed the 10-year yield, inverting the yield curve and causing increased concern about an upcoming recession.

Recession Predictor

Over the past 50 years, the 2-year rate has surpassed the 10-year rate before every recession. Investors will remember the last time the yield curve looked like this was in December 2005, approximately two years before the financial crisis. In fact, according to Credit Suisse, an inverted yield curve projects a recession around 22 months after the inversion.

The difference between this inverted yield and the one that 14 years ago predicted the largest recession since the Great Depression is that interest rates were never allowed to fully recover and normalize from the mini recession in 2016. The 30-year bond reached an all-time low in the summer of 2016 before that record was just recently surpassed. Although the global economy has historically faced recessions following yield curve inversions, the stock market has gone through both booms and busts during these times.

Stocks Can Still Go Higher

The good news for traders and investors is that historically, during the lag between a yield-curve inversion and economic downturn, equities have performed better than expected. According to data from Credit Suisse, in the year and a half following an inversion, the market rallies on average 15 percent before returns go negative around six to seven months later.

Specifically, sectors such as utilities, and consumer staples tend to remain positive because of their defensive nature, with utilities outperforming the S&P by over 5 percent on average in the last three instances of this inversion. This trend has continued as just recently, Duke Energy (NYSE:DUK) and Dominion Energy (NYSE:D), two of the biggest American energy companies, have fought the market sell-off, just like consumer staples giants Walmart (NYSE:WMT) and Procter & Gamble (NYSE:PG). As we look ahead through the next 18 months and towards what may be a recession, utilities and consumer staples will be the sectors to keep a close eye on.

Will Bitcoin Sink Or Float In A Recession?

Bitcoin has so far weathered the storm that has hit markets but a closer look at Bitcoin and its intrinsic characteristics reveals why Bitcoin cannot be trusted as a reliable hedge against stock market downfalls yet. While the situation might improve if and when Bitcoin is identified and treated as an alternative asset class, gold is currently a better hedge than Bitcoin for market corrections. Bitcoin still has a long way to go and will probably become a strong hedge against market corrections if it can achieve below.

1. Remain less volatile under normal market conditions, which would boost investor confidence in Bitcoin. Currently, traders love Bitcoin for this very nature as wild swings in price provide traders with the opportunity to profit in the short term. If Bitcoin is to become a proper hedge against stock market corrections, a flair of formidability should be displayed, which would not only attract institutions toward Bitcoin but also would discourage traders from betting on Bitcoin for short term profits.
2. Develop intrinsic characteristics to sway away from being attached to the investor sentiment on stocks. Currently, investors tend to consider Bitcoin as a compliment rather than an alternative to stock market investing. If Bitcoin is to receive recognition as a hedge against stock market corrections, there should be reasons to believe that Bitcoin in its own right is an investment.

While the major use of Bitcoin is as a currency rather than a hedge against a downturn in any other asset class, this research was conducted to address the issue of Bitcoin being considered a hedge against stock market downturns. To conclude, Bitcoin is not by any means a better hedge than gold in times of equity market selloffs at present.

We’re in An Event-Driven Economy

So, what does the inverted yield curve mean for the current global economic situation? The yield curve is certainly an indicator that should be monitored closely for potential warning signals. However, much like the rest of this year, the most important indicators are event driven. This year has been dominated by the U.S. trade war with China, the Federal Reserve’s policies, a decline in global interest rates (many falling to negative territory), and the “Deal or No Deal Brexit” situation.

All of these economic events factor into the yield curve as well as day-to-day market performance. In an event-driven economy, which we are clearly in, these global issues have garnered the undivided attention of traders, investors and economists. Although the yield curve has historically been predictive of a forthcoming recession, global current events around the world may be the best indicator of when we might actually enter a recession as well as how long it could last.