After a great deal of coverage around the new year, the inverted yield curve has become background noise to many market paricipants. Many economists and analysts have discounted the potential for an economic slowdown signaled by the inverted yield curve.
Caroline Baum at Bloomberg.com notes economists in the past have been burned by discounting the risk of slowdown in the presence of an inverted yield curve.
Despite the yield curve’s proven track record, economists can’t seem to get it. They look at low long-term rates in a vacuum and see them as stimulative. By all rights, Japan should have been booming with sub-2 percent bond yields for the past eight years.
Baum notes the fact that the futures market is anticipating with a high degree of probability another Fed funds increase at the March meeting. At that point the yield curve will be decisively inverted. The question is whether the historical record of the yield curve will play out as it has in the past.
Anticipating the end of the Fed’s rate increasing cycle Mark Hulbert at Marketwatch.com discusses some research that shows the market does not perform well after the end of a series of rate increases. In short investors need to hunker down in anticipation of a tougher stock market even if the March meeting is the end of the rate increase cycle.