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  • Writer's pictureBrian John Gabriel

This Time Is Not Different

Updated: Apr 20

“The investor who says, 'This time is different,' when in fact it's virtually a repeat of an earlier situation, has uttered among the four most costly words in the annals of investing.” - Sir John Templeton

Treasury inversions- for example when the 10 year treasury yields less than the 3 month treasury- reliably occur before recessions and stock bear markets.  Presently the 10 year and 3 month treasury yields have been inverted for an astounding 540 days without a bear market in stocks.  This has prompted some to claim that “this time is different” and “this yield curve may not signal a U.S. recession.” 

However, the length of the present 10 year and 3 month treasury (10y/3m) inversion is alarming.  At 540 days the present 10y/3m inversion rivals the pre-financial crisis 10y/3m inversion which began 1/18/2006 and lasted 569 days before the S&P 500 lost over 50% of its value from its peak.    

Furthermore, the length of the 10y/3m treasury inversion has been proportional to the subsequent drop in the S&P 500.  Below is a graph showing the last four instances of 10y/3m inversions occurring in the past 35 years.  Plotted are the length of each treasury inversion versus the subsequent drop in the S&P 500.  

Graph of length of 10y/3m treasury inversions versus the subsequent drops in S&P 500.  From left to right the data points represent 10y/3m inversions occurring prior to the 1990 recession, 2020 recession, 2001 recession, and the 2008 financial crisis. The percent drop in S&P 500 price is calculated from the first day of the 10y/3m treasury inversion to the bottom of the subsequent S&P 500 bear market. Data: Federal Reserve Economic Data (FRED), Yahoo Finance, Gabriel Private Alpha Fund LP  

Note that in May of 1989 a short (44 day) 10y/3m treasury inversion began which presaged a recession in 1990, but there was no bear market.  Unlike today, from 1989 to 1992 the Federal Reserve steadily decreased interest rates.  (See the Hippocratic Oath of Investing to learn more about the importance of the Federal Reserve and interest rates.) 

The length of treasury inversions is related to subsequent reductions in S&P 500 prices with a high negative correlation of -0.86.  Utilizing the trendline to forecast a bear market bottom S&P 500 price today, an inversion of 540 days forecasts an S&P 500 change of -52% from the S&P 500 price of 3719.98 on the day when the most recent 10y/3m inversion began (10/18/2022), or 1778.73.  This forecasted value for the S&P 500 of 1778.73 is a staggering 62% below the price of the S&P 500 today.

The longer 10 year and 3 month treasuries remain inverted without a financial crisis, the greater the calls for a soft landing for our economy.  Although our data is limited with only five instances of a 10y/3m treasury inversion occurring in the past 35 years, history suggests that investors should remain cautious.  In the past, 10y/3m treasury inversions with rising interest rates produced bear markets in stocks.  This time is likely not different.  

This article reflects the current opinion of the author.  All opinions expressed in this article reflect the judgment of the author at the time of publication and are subject to change.  The article is based upon sources believed to be accurate and reliable.  Opinions and statements about the future expressed in the report are subject to change without notice.  Do not assume any information contained in this article serves as receipt of investment advice or a substitute for personalized investment advice from Brian Gabriel.  The report is not a solicitation or an offer to buy or sell any security.

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