The stock market’s performance has been mixed in periods when the Treasury yield curve is warning of a recession, but there are stocks that have done consistently well during those times, Trivariate Research has found. The firm studied the periods of yield curve inversion back to the 1970s. The stock market in this cycle has started off worse than eight previous occurrences, but it has been rebounding. The yield curve is inverted when shorter duration yields trade above those of longer-duration Treasurys. When it is inverted, it is viewed as a recession warning. A commonly watched spread between the yields of the 2-year and 10-year note first went negative briefly in the spring, meaning the 2-year yield was higher than the 10-year. Then it inverted again in July, and has since stayed that way. Following the initial inversion in past cycles, stock market returns were mixed for the first six months, and then the market typically performed well. Returns were negative a year later only twice — following the September 1980 and February 2000 inversions. “The strong rally so far since mid-June has largely offset the initial post-inversion sell-off, but our judgment is this is more about positioning and sentiment than any underlying fundamental strength,” Trivariate analysts led by Adam Parker said in a note . What to buy But the firm does see an opportunity for investors in the type of stocks that consistently outperformed during those prior periods. “In the last 25 years when the yield curve was inverted, growth stocks lag value and high-quality stocks lag junk,” Trivariate said. Utilities, energy, health care and consumer staples were the best performing sectors during yield curve inversions, while technology, consumer discretionary and materials were the worst. “So far this cycle, utilities is the only sector up in absolute terms, and communications services, financials, and materials have underperformed,” according to Trivariate. “Every sector is double digits worse this cycle than the average historical cycle.” Trivariate screened for value stocks from the bottom half of quality sectors that typically show relative outperformance during yield curve inversions. Five of those companies are HCA Healthcare, Occidental Petroleum, Kraft Heinz, Cheniere Energy and Walgreens Boots Alliance. HCA shares are down more than 16% for the year, but they have rallied 27% in the third quarter. Occidental Petroleum, meanwhile, has more than doubled in 2022 thanks in part to a surge in oil prices. Cheniere has also gotten a boost from higher energy prices, gaining 64% year to date. Kraft Heinz has outperformed this year, gaining 5.6% this year. Walgreens is down 27% in that time, however. Some of the inversions since 1978 lasted more than a year. Trivariate expects this could be a longer period because of elevated inflation. The consumer price index, up 8.5% in July, could remain high due to the impact of rising rents, it noted.
