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A display of Procter & Gamble’s Pampers diapers are seen on sale in Denver.
Rick Wilking | Reuters
The bond market’s main yield curve inverted on Wednesday, triggering worries of an eventual recession. But investors can still win, even if the clock is ticking on this bull run.
The yield on the benchmark 10-year Treasury note was at 1.623% on Wednesday, below the 2-year yield at 1.634%. This means that investors will now receive higher returns on a short-term bond than a long-term Treasury note, a trend that signals investors are worried and looking for a long-term safe haven for their money.
CNBC used Kensho, a hedge fund analytics tool, to determine which sectors of stocks perform the best after a yield curve inversion. This type of inversion has happened three times since 1980 and data showed that only two sectors yield positive returns six months after an inversion 100% of the time, and only one sector beats the broader market.
Utilities is the best performing sector after a yield curve inversion. Although the inversion is an early recession indicator, data shows that if investors turn defensive, there is still a buying opportunities for stocks.
If you bought one day before a yield curve inversion and sold 6 months later, the return on the utilities sector averages a 8.59% return.
Utilities are generally more stable stocks, as demand for electricity and gas is a steady consumer and business need. Investors dump into utilities in times of uncertainty because of their higher dividends and steady cash flow.
Electric power company Duke Energy has a dividend yield of 4.2%, and energy producer Dominion Energy has a dividend yield of 4.9%.
Consumer staples stocks, like Procter & Gamble and Coca-Cola, are the other consistent winners in the months following an inversion, with positive returns after all three of the last inversions.
But this inversion doesn’t mean the market’s overall run is over. The average return on the S&P 500 is 3.47% six months out, with positive returns during all three of the last inversions.
Similarly, consumer staple stocks are less volatile, more defensive play.
While there is a shift into more defensive stocks, the overall market typically has another 18 months to run before it starts to roll over following a yield curve inversion, according to data from Credit Suisse.