Investor Beware: The Market Is Flashing This Grim Signal

The inverted yield curve precedes a recession. If that is true, you should invest in recession-ready stocks. Toronto-Dominion Bank (TSX:TD)(NYSE:TD) performed well during the 2008 financial crisis and will no doubt survive the next recession.

| More on:
Red siren flashing

Image source: Getty Images.

When market analysts mention the term inverted yield curve, it means there is an impending recession. And when the U.S. bond market flashes the signal, it affects the rest of the global markets. The trade tension between the U.S. and China is also prompting a sell-off in the broader stock market.

A simple explanation of an inverted yield curve is this: it occurs when interest rates on bonds with longer maturities are lower than the interest rate on shorter-dated bonds. Jittery investors shift their investments to longer-term bonds, which they perceive as safe havens.

As money comes in, the prices on these bonds rise while yields drop. It follows the law of supply and demand. Last week, and for the first time since late 2005, the inverted yield curve signaled a looming recession.

But is the inverted yield curve accurate in predicting a recession is on the way? It might be a false alarm and that the longest-running bull market is not yet ending.

The Great Recession

The Great Recession occurred in December 2007 and lasted until June 2009. The alarm bells rang from mid-2006 to early 2008, about one-and-a-half years before the recession began. The start came in late December when the yield curve between the 10-year and two-year U.S. Treasury notes inverted.

This month, the inverted yield curve happened twice. As in the past, an inverted yield curve precedes a recession. And the adverse effects of a recession could last for two years after it officially ends, just like in the 2008 recession.

Resilient bank stock

Let’s analyze the performance of Toronto Dominion Bank (TSX:TD)(NYSE:TD) to find out if the recent recession had an impact on the bank stock.

On June 1, 2006, when the alarm bell first rang, TD was trading at $30.17. By the end of the year, the stock was higher by 15.5%. But towards the end of 2008, TD fell by 37.6% to $21.73. The lowest price recorded by TD was $17.33 on March 9, 2009. Since then, the price gradually rose. TD is trading at $71.58 today.

The global financial markets are deeply connected and dependent on the U.S. for trade and investments. So, if recession hits U.S. banks, it follows that TD and the major Canadian banks would be in grave danger.

However, all of the big banks survived the crisis, and none called for a bailout. Because of that, Canada became known as the country with the soundest banking system in the world.

Recession ready

TD’s performance during the financial crisis illustrates that not all stocks will fall during a recession. The bank is best positioned to survive the next downturn if it comes.

During those trying times, TD lessened its investment banking and trading activities to avoid exposure to risky operations. The focus shifted to consumer or retail banking.

Today, TD has exceptional credit quality and a stronger balance sheet. I see the stock having a tremendous upside potential and will hold up during tough economic times. If it’s not the safest bank in North America, then I don’t know what is.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Christopher Liew has no position in any of the stocks mentioned.

More on Dividend Stocks

Businessman holding tablet and showing a growing virtual hologram of statistics, graph and chart with arrow up on dark background. Stock market. Business growth, planning and strategy concept
Dividend Stocks

TFSA Magic: Earn Enormous Passive Income That the CRA Can’t Touch

If you're seeking out passive income, with zero taxes involved, then get on board with a TFSA and this portfolio…

Read more »

Man with no money. Businessman holding empty wallet
Dividend Stocks

2 Stocks Under $50 New Investors Can Confidently Buy

There are some great stocks under $50 that every investor needs to know about. Here’s a look at two great…

Read more »

think thought consider
Dividend Stocks

Down 10.88%: Is ATD Stock a Good Buy After Earnings?

Alimentation Couche-Tard (TSX:ATD) stock might not be the easy buy-case it once was. Here’s a look at what happened.

Read more »

money cash dividends
Dividend Stocks

TFSA Dividend Stocks: Earn $1,200/Year Tax-Free

Canadian stocks like Fortis are a must-have in your portfolio to earn tax-free yields for decades.

Read more »

sale discount best price
Dividend Stocks

1 Dividend Stock Down 11 Percent to Buy Right Now

Do you want a great dividend stock down 11% that can provide years of growth potential? Here's one heavily discounted…

Read more »

Growth from coins
Dividend Stocks

1 Grade A Dividend Stock Down 11% to Buy and Hold Forever 

If you're looking for the right dividend stock at the right price, you're going to want to consider this insurance…

Read more »

Target. Stand out from the crowd
Dividend Stocks

2 Dividend Stocks to Double Up on Right Now

Are you looking for dividend stocks to buy right now? Here are two top picks!

Read more »

edit Taxes CRA
Dividend Stocks

Tax Time: How to Keep More of Your Money

Nearly everyone hates paying taxes, although Canadians can lessen the financial pain with the right tax strategies.

Read more »