Bear Market Signal #1: Yield Curve Inversion

Bear Market Signal #1:

A Big Warning from a Fancy Term Most People Don’t Get

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Welcome to Day 1 of our Bear Market Signal series.

Each day, we'll be highlighting a different critical warning sign our analysts are tracking to pinpoint when the next bear market will arrive.

Some of these indicators are big, obvious problems — like outrageous levels of debt. Some are more technical.

We'll be following these indicators for you in the coming months, whether you personally keep tabs on them or not.

But if you understand them yourself, you'll have a big advantage over the vast majority of people in the markets.

We're starting today with a term you might have heard tossed around quite a bit lately on cable TV and in the news:

The yield curve.

As Stansberry Digest editor Justin Brill explains:

The yield curve has been one of the most reliable "early warning" signals for stocks and the economy for decades.

In short, whenever the yield curve has "inverted" — that is, whenever short-term interest rates have exceeded long-term rates — bear markets and recessions have inevitably followed anywhere from three to 18 months later.

In addition, because the business of banking is based on borrowing money at short maturities and lending at longer maturities, inversion is terrible for most financial companies.

The most widely followed measure of the yield curve — the difference between the yield on 10-year U.S. Treasury notes and two-year U.S. Treasury notes — is known as the "2-10" spread. It remains above zero for now, but it's dangerously close to inverting.

And two less-followed spreads — the "2-5" spread and the "3-5" spread — have already inverted, which suggests it's just a matter of time before the 2-10 does as well.

As of last month, more than 50% of spreads across the curve — ranging from the short-term federal funds rate through 30-year Treasurys — have now inverted...

Percentage of Inversions in the U.S. Yield Curve

Even more concerning, the median spread has now also turned negative for the first time since 2007...

Median of All Spreads in the U.S. Yield Curve

To be clear, the most-followed "2-10" spread has still not yet officially inverted...

But history suggests the "tipping point" has been reached. The clock is ticking.

True Wealth editor Steve Sjuggerud and his team have been tracking this indicator, too.

Steve and his team are predicting a major "Melt Up" in stocks — a furious final leg of the bull market. They're among the most bullish analysts anywhere, as far as we know — in the short term.

But their Melt Up thesis comes with a major caveat. It's tied — by definition — to the idea that a major Melt Down is on the way.

And the yield curve is the key signal they're tracking.

Here's what they wrote back in December:

This Melt Down indicator has a near-perfect track record... never missing a market top, and only giving a few "false positives."

We're getting close to a signal for the Melt Down indicator. But we aren't there yet.

As longtime readers might guess, the indicator I'm referring to is interest rates. More specifically, it's the interest rate spread between 10-year and two-year Treasury bonds.

This spread is important because long-term and short-term interest rates move for different reasons. Longer-term 10-year yields move based on the market. But short-term two-year yields move largely because of the Federal Reserve.

In a healthy market, long-term rates should be higher than short-term rates. Investors demand higher payments when they lock their money away for a long time.

The Fed has been hiking rates in recent years. Short-term rates have risen. Long-term rates have too, but not nearly as quickly.

This sets up an important potential signal. History tells us that when the yield curve inverts (and two-year yields move higher than 10-year yields), bad times are ahead in stocks. You can see it in the chart below...

10 year Treasury rate minus 2-year rate

This has worked going back 40 years. Stock market peaks happened in 1980, 1989, 2000, and 2007. They happened every time the yield curve inverted and the line dropped below zero.

This indicator has been inching closer to zero in recent months, but we're not there yet. That's important. It tells me the current correction likely isn't the next Melt Down. History says the Melt Down shouldn't begin until this indicator moves below zero.

Stocks, of course, ended the year with their worst December since the Great Depression... and their first negative full-year return since 2008.

And the key yield curve indicator — the "10-2 spread" — continues to inch toward zero.

It's time to be cautious.

Our next Bear Market Signal is a $22 trillion problem that's getting worse every day (with help from the folks in Washington). And it's making another major bear market much more likely. Click the "Bear Market Signal #2" button below to learn more.

Special Guests

Jim Rogers

Jim Rogers

Jim Rogers is an American businessman, investor, traveler, financial commentator and author based in Singapore. Rogers is the Chairman of Rogers Holdings and Beeland Interests, Inc. He was the co-founder of the Quantum Fund and creator of the Rogers International Commodities Index.

Porter Stansberry

Porter Stansberry

Porter Stansberry founded Stansberry Research in 1999 with the firm's flagship publication, Stansberry's Investment Advisory. He is also the host of Stansberry Investor Hour, a weekly broadcast that has quickly become one of the most popular online financial radio shows. At Stansberry Research, Porter oversees more than twenty of the best editors and analysts in the business, who do an exhaustive amount of real-world, independent research.

Austin Root

Austin Root

Austin Root is editor and portfolio manager for the Stansberry Portfolio Solutions products and American Moonshots. He is also director of corporate development at Stansberry Research and a senior analyst for Stansberry's Investment Advisory.