But an inverted yield curve spells trouble for investors later this year

Look for stocks to rally into midyear before things get ugly, says TheDowTheory.com editor Manuel Blay

The new year has not quite shaped up as some investors had hoped, though we are only one — albeit ugly — quarter into it.

With the S&P 500 closing out its worst three-month period since late 2022, some investors might be considering dip-buying opportunities, that is, if they can push through a murky tariff landscape.

There’s encouragement for dip buyers in our call of the day from TheDowTheory.com investment newsletter editor Manuel Blay, who sees one last whoop coming from stocks before the bears settle in.

The market-timing newsletter says it has steered clients correctly in the past, such as when to buy stocks in 2002, when to exit in 2007, re-enter in early 2009 and stay invested up to 2018.

Before we get to the whoop, Blay flags trouble down the road for stocks via the 3-month Treasury bill / 10-year Treasury note yield curve, which inverted in late February.

A yield curve inversion occurs when short-term rates move above long-term rates. Since the Feb. 26 inversion, it has seen several un-inversions and reinversions, when the yield curve returns to its normal upward slope.

Over history, those inversions “have been among the most reliable warning signs for bear markets and recessions,” Blay explains in a new letter to clients. The exception to this was the October 2022 inversion, the first since 1990 that didn’t lead immediately lead to either scenario, he adds.

While that’s proof no indicator is perfect and price action remains crucial, he says inversions are a still sign that “something is off beneath the surface. Normally, investors expect higher returns for long-term bonds. When short-term rates rise above long-term ones, it often reflects weak growth expectations.”

Since 1990, it has taken an average 6.3 months for a bear market to arrive after an inversion and 13.6 months for a recession, says Blay. But this time around, he notes investors are not just facing the inversion that started Feb. 26, but fallout from a recent un-inversion.

He said history shows those un-inversions “have often led to substantial market declines,” and when those happen during bull markets, they often precede:

1. An average peak-to-trough stock market fall of 30.19%. History repeating would mean a decline to 4,289.23 from the Feb. 19 peak of 6,144.15. The S&P 500 closed at 5,611 on Monday.

2. A bear market starting within an average 356 days of said un-inversion.

So while the October 2022 yield curve inversion didn’t lead to a stock drop “maybe it’s the second knock — the inversion that began on 2/26/25 — that breaks the bull’s back,” says Blay.

As for when that bearish action might begin following an un-inversion during a bull market, history shows the market has rallied an average 10.92% over 263 days before the start of a downturn, he says. “This suggests there may still be one last ‘hurrah’ for the bulls — before the market eventually succumbs to stronger bearish forces.”

Blay offers a few reasons why he’s expecting stocks to rise into midyear. Those include: beaten-down sentiment in which even a modest shift could trigger a rally; improving liquidity; and no historical precedent for a recession happening when sentiment and consumer surveys are negative, but hard economic indicators are positive.

Also , the financial sector exchange-traded fund is still outperforming the S&P 500 ETF, which is not what one would expect if a recession is looming. “Healthy financials suggest that the dire implications of the inverted yield curve can be put aside, at least for the next few months,” he says.