Canaccord Genuity’s Tony Dwyer “wrote that financials bottomed in relative performance when the yield curve reached about 35 basis points–that’s where it stands currently–for both the 1990s and 2000s cycle. The sector actually outperformed the market from that point on as the curve flattened some more, until it inverted, going into the negative numbers,” according to Barron’s.
Flatter yield curves means the cost of long-term debt is falling faster or not growing as quickly as the cost of short-term debt. Historically, flat yield curves have been reliable indicators of looming recessions.
Canaccord Genuity’s Dwyer “pointed out that even though every recession in the past 60 years has been preceded by an inversion of the curve, it takes an average of 18.5 months to reach the cycle peak from the initial date of inversion and the S&P 500 has realized a median gain of 21% during that time period,” reports Barron’s.
For more information on the banking sector, visit our financial category.