History suggests the answer is probably no

History suggests the answer is probably no. More often, the reversal of a yield-curve inversion has signaled that the wheels are about to come off the economy and the stock market with it, according to Tom Essaye, a former Merrill Lynch trader and founder of Sevens Report Research.

Since 1998, the spread between the 2-year and 10-year Treasury yields has inverted six times, including this latest episode, which began in July 2022. The others started in June 1998, February 2000, January 2006, June 2006 and August 2019. Only three of these episodes, including the current one, saw the yield curve remain inverted for a substantial amount of time. The others began in February 2000 and June 2006.

In both cases, the un-inversion of the yield curve preceded a turbulent stretch for stocks. When the 2s10s spread returned to positive territory on Dec. 29, 2000, the S&P 500 was trading at around 1,320. The S&P 500 declined for the next 22 months, bottoming out around 785 in October 2002, Essaye said.

According to Essaye, the logic behind why such a shift in the yield curve doesn’t bode well for the economy is fairly straightforward.

“When [2s10s] turns back positive, it’s usually because the 2-year Treasury yield is falling quickly as investors price in aggressive rate cuts. Rate cuts usually occur because the Fed is worried about economic growth,” Essaye said. “That’s happening right now, as the market prices in 100% chances for a September and December rate cuts and a growing chance for a third cut this year.”