It has been another crazy week in the stock market as traders have reacted to a signal of impending recession sent by U.S. Treasuries. At one point earlier this week, the yield on the 10 Year Treasury Note briefly dropped below that on the 2 Year, completing the “inversion” of the yield curve that started to form back in December when the 5 Year yield fell below the 2 Year. As I’m sure you are aware by now, the 2s 10s inversion has preceded every recession in the last 50 years, but what has not been said as often is that not every inversion has resulted in a recession.
Given the distortion in global bond markets that has resulted from post-recession central bank intervention around the world, there is a good chance that this will be one of the false signals. Stock traders, however, have reacted as if a recession is certain, and one of the hardest-hit sectors has once again been energy. That isn’t a surprise. It has been a frustrating year for energy investors as every hint of a slowdown has put stocks in the sector under pressure, and a full-blown recession would obviously impact energy demand.
After such a bad year, though, much of the pessimism that the inversion has engendered in stock traders was already priced into the more globally sensitive energy markets. That makes this push lower look like a good opportunity for those with a longer-term view to start picking up something like the energy sector ETF (XLE) at what looks like a discount.