Last month, for the first time since the GFC, the US yield curve inverted. This was significant because since 1956, the stock market has peaked after an inverted yield curve before falling into a recession. The time between inversion of the yield curve and recession has been 7-24 months. Normal yield curves are where long-term yields are higher than short-term yields. An inverted yield curve is the opposite: short-term yields are higher than long-term yields.
Avoid the banks
Inverted yield curves are particularly painful for banks. Banks borrow at short-term rates and lend at long-term ones. A flattening of the yield curve means margins are squeezed and inversion of the yield curve hurts margins. In March, the US financial sector was the worst performing sector in the US stock market, down 3.4%. Here in Australia, Australia and New Zealand Banking Group (ANZ) was down 7% and Commonwealth Bank of Australia (CBA) down 4.5% for the month of March.