Yield Curve Inversions Don’t Improve Investment Outcomes (AIER)
In the middle of the last few months’ inversion hype, Eugene Fama and Kenneth French tried to figure out if yield curve inversions carry valuable and actionable information for investors. Using monthly returns for U.S., World, and World ex-U.S. between 1975 and 2018 and checking six different spreads (5y-1m, 5y-1y, 5y-2y, 10y-1m, 10y-1y, 10y-2y), they found "no evidence that inverted yield curves predict stocks will underperform bills." In light of the yield curve signal’s inability to overperform, it seems that for most investors the takeaway is that yield curve inversions are mostly noise. Ignore them and stick to your strategy.