A flattening can make investors nervous since it can precede an inversion (short-term yields exceeding long-term), which the article points out “has historically been a warning sign of a coming recession, and bear market for stocks.”
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A recent report by J.P. Morgan’s global stock strategists argues, however, that the Fed Funds rate remains “modest relative to the rate of inflation” and that investors need not fear a flattening of the yield curve. Historically, it says, the S&P 500 has posted positive returns during each of the six “flattening” periods since 1980 (with a median return of 9%).
“In other words,” the article concludes, “if history is a reliable guide, stock investors should shrug off flattening bond yields and stay invested, until the yield curve inverts, after which it will perhaps be time for some orderly profit-taking, but not panic selling.”
This article has been republished with permission from Validea’s Guru Investor.