Worried About An Inverted Yield Curve?

Beware the Ides of March is a warning phrase that stems from Roman times when Julius Caesar was warned to stay home or risk losing his life. In the stock market, various cautionary warnings are trotted out each year to scare the retail trader.

Sell in May and stay away is a popular refrain in late April on the financial news networks. Buy the Santa Claus rally they tell you in December. And these days the fear-mongering adage trotted out like a show pony relates to an inverted yield curve and states: when the yield curve inverts the markets will fall.

Here is the problem with conventional wisdom. It rarely works when everyone has the same opinion and, at the very least, the timing will surprise most everyone. Now that the talking heads are injecting fear into the minds of the public about the impending crash from a yield curve inversion, perhaps the contrarian play should be pondered. Or consider the timing may differ from conventional expectations.

Perhaps the financial gurus who pay public relations firms top dollar to be featured on the big-name networks are right. But equally it is possible that their timing will be wrong. Maybe when markets are bubblicious they keep going longer than the majority expect.

As a savvy investor, you should pause when the consensus rallies you to a cry of buy-buy-buy or sell-sell-sell. Sometimes the news infects you like a virus where you hardly know you’ve been bitten by a new idea until you hear yourself repeating it to a friend at the local golf club or over dinner.

Then it is clear as day, or should be, that blindly following a trading rule with absolute certainty is a fool’s game. Unless that rule is buy low, sell high (the holy grail!), most every other one should be scrutinized.

A yield curve inversion may have always led to recessions but will it again? The number of factors affecting market prices increases over time. In the beginning, economies were largely influenced by domestic factors. But these days, global flows of capital into the stock and real estate markets cloud the old rulesets and require a broader lens through which to analyze market direction.

At the very least when you are not sure where stocks are headed next, hit the brakes a bit more than the gas. That may mean investing more in a dividend-paying stalworth like Coca Cola and less into a high flier like Netflix.

Whatever your strategy, be thoughtful. Challenge convention. And make decisions independent of the noise of ticker symbols flying across a screen and loud debates by bulls and bears. Sometimes, the best strategy is to turn off the TV, check out where stocks are headed next and invest independently with conviction.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.