(Bloomberg) — Stock investors shouldn’t fret about U.S. treasury yield curves inverting just yet, JPMorgan Chase & Co. strategists said, as a global bond selloff gathered pace.
“Recessions don’t typically start ahead of the curve inverting, and the lead-lag could be very substantial, as long as 2 years,” the strategists led by Mislav Matejka wrote in a note. “Further, over this timeframe equities tended to beat bonds handsomely,” they said, adding that the peak in equity markets historically takes place around a year after the inversion.
U.S. stocks are on course for their best month this year, braving the war in Ukraine and the prospect of more aggressive rate hikes by the Federal Reserve to tame inflation. While a spike in commodity prices has raised concerns about the economic outlook, exacerbating the steepest bond rout of the modern era, equities have so far remained largely immune to recession jitters.
“Recessions only started on average 16 months after the inversion in the spread, and never before,” JPMorgan strategists said. As the 10-year-2-year curve “is not outright inverted at present, the clock has not started ticking yet,” and “equities still offer supportive risk-reward over the medium term,” according to the note.
A growing number of money managers are betting equity indexes have already largely priced in bearish bond moves, while all signs suggest the U.S. economy remains in decent health. Some contrarian buy signals are now emerging. Bank of America’s Bull & Bear Indicator is flashing buy on equities for the first time since the onset of the pandemic in March 2020.
To be sure, not everyone is so sanguine. Morgan Stanley strategists led by Michael Wilson said Monday that headwinds to growth from the Fed’s policy shift, high inflation and the war in Ukraine “are not priced.” The equity risk premium should be higher, they said, downgrading U.S. financials to neutral from overweight.
©2022 Bloomberg L.P.