Does the inverted yield curve signal trouble for the stock market?

Question

Is this one of the major signs that the US markets will take a downturn in 2007. I heard on CNBC that 6 out of 6 times the stock market has sold off in past situations like this. Any ideas? Is there any safe harbor for money (internationally) through ITF's or anything during a potential downturn. I suspect if the US market heads low, the international markets will fare even worse.

Answer 1

We've also never had a stronger economy as today's compared to when those other inverted yield curves occurred. Prime and the 10-Yr T-Note are still pretty low - which helps! (see link) Obviously, only time will tell.

http://mortgage-x.com/trends.htm

Answer 2

Inverted Yield Curve does not necessarily mean trouble for stock market. The running joke that I recently heard from a Fed Governor is that Inverted Yield Curve has predicted 8 out of the last 3 recessions. The consensus is that systemic factors have changed and have resulted in inverted/flat yield curve. Term Risk premia is lower these days.
Having said that it is true that stock market sells down on expectations of recessions since growth expectations need to be revised downwards.
If there is a sell off, there are a lot of safe havens available. Since you mentioned ETFs, currency ETFs may be an option - DBV, FXE etc. are some choices. The idea would be to look for economies with low correlation to the US economy.

Answer 3

The yield curve indicates what the market thinks will happen to interest rates. If it is inverted, the market believes that rates will decline. The decline in rates will be the result of inflation declining and growth in the economy slowing. The lower rates will hopefully provide stimulus to the economy because it will be cheaper to borrow money and companies will invest more of their money because it is cheaper. This in turn will likely increase inflation and economic growth and will likely cause the yield curve to steepen.

A possible place to park your money would be in bonds if rates are expected to decline. If rates decline, the value of the bonds increases. The yield curve suggests that bond investments should be short-term. That is also where you will be able to find the highest yield.

Answer 4

International markets are going to do very well. China and India are growing because jobs are being outsourced to them, factories are being built and a middle class is emerging. More resources are being demanded by this large emerging middle class. Almost every other stock market in teh world fared way better than the US in the last five years. WAAY better. US isn't the only consumer in the world anymore. International markets will fare much better because they are still expanding as many other countries continue to industrialize.