By Ben Levisohn
When the yield curve “inverted” last Friday, markets suffered a brief moment of panic before remembering that a recession usually takes 12 to 18 months to show up after such a move. As it happens, that time frame would put the economic swoon just before the 2020 presidential election—which would presumably help the Democrats.
Presumably, but not necessarily. A recession isn’t preordained, of course. Long-term Treasury yields would need to stay lower than short-term ones for longer than just a few days for the signal to be meaningful, and right now the yield curve looks quite “weird,” as my colleague Alexandra Scaggs noted. Trying to pick which way the Dow Jones Industrial Average, S&P 500,and other stock market indexes will go is difficult enough without trying to time the what-ifs of recessions and elections.
Still, it is worth wondering what the yield curve could be saying, and there is no better way than to look to history as a guide. Deutsche Bank strategist Alan Ruskin has done just that. In a note released Tuesday, he looked at past yield-curve inversions and what they meant for incumbent candidates or parties.
Two examples stand out: Ronald Reagan’s win in 1980 and Barack Obama’s victory in 2008. In both cases, the yield curve had inverted meaningfully, and the economy had slipped into deep recessions by the time of the election. In both cases, the incumbent party lost. “On both occurrences we know, that at the time of the election, the economy was in unusually poor shape, almost certainly encouraging the Reagan 1980 and Obama 2008 wins,” Ruskin writes.
The rest of the time, the results have been mixed. A flat curve hasn’t benefited either the incumbent party or the challenger, and a steep yield curve didn’t help the Democrats in 2016, George H.W. Bush in 1992, or Gerald Ford in 1976. “Each of them had a special story,” Ruskin explains.
As a result, the yield curve, though it does have some predictive abilities, should not be taken as the be-all and end-all for the 2020 election. “The yield curve is only one indicator, albeit one that is particularly interesting because of its possible long lead time,” Ruskin writes. “Currently, the curve’s message is rather simple and suggests that come the 2020 election, the electorate may well be demanding new economic ideas in the face of a slowing economy, that in turn may produce more ‘out of the box’ thinking than in traditional campaigns.“
In other words, it’s an indicator that shouldn’t be ignored.
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