By Bilal Hafeez 23-08-2019

Inverted Yield Curves and Expected Stock Returns (Fama and French Working Paper, 15 min read)


(You can read the article by clicking here)

Trying put to rest the widespread concern that the recently inverted yield curve predicts a looming recession, two Professors of Finance, Eugene Fama and Kenneth French, test the hypothesis that inverted yield curves predict low stock returns or, in other words, negative equity premiums. They use monthly stock and government bond data from 1975 to 2018 in several scenarios and find no evidence that the inversion predicts a drop in stocks and consequently a recession.

Why does this matter? Macro Hive’s view is that the US probably won’t face a recession in the immediate future (we discusswhy in one of our specials this week). Fama and French’s research supports our view and consequently we see no reason to fear plummeting stock markets. This piece also caught our eye – it tracks a Business Cycle index formed of a number of indicators, and it’s currently calm.

(The commentary contained in the above article does not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs.)