The Motley Fool

Why the yield curve inversion could boost your ASX share portfolio higher

The S&P/ASX 200 (INDEXASX: XJO) index had a day to forget yesterday as the Aussie index fell 2.85% to wipe more than $60 billion off the domestic market.

However, could the recent inversion of the much talked about “recession indicator”, or the 10-year versus 2-year Treasury bond yield spread, actually be a good thing for your portfolio?

Why it’s not all doom and gloom

Before going any further, it is worth noting that the inversion of the 10–2 yield curve has preceded every major recession in history, which on the surface doesn’t look good for investors.

However, the key here is that while a negative spread has been a solid indicator, no one can predict exactly how long after the inversion a recession may occur.

Generally, these recessions have occurred within 24 months of the yield curve inversion, meaning you could have up until August 2021 with solid economic growth before things head south, assuming history repeats itself.

Additionally, markets have historically performed very strongly in the lead-up to some of the biggest recessions we’ve seen, meaning keeping your money in the market may actually benefit you, even with the occurrence of a recession.

As an example, the S&P 500 showed a strong bull run prior to its downturn around November 2007 when the GFC hit, but some panic sellers would have fared better to just keep their money in the market.

If a hypothetical $100,000 in a top growth stock like Afterpay Touch Group Ltd (ASX: APT) surges 60% in the next two years to $160,000, then the market subsequently plummets 30%, that investor is still up $12,000 compared to the guy who exited when the yield curve inverted.

So, while it is true that yield curve inversions haven’t been great for equity investors in the past, in my view it’s a little bit overzealous to think that the market is suddenly going to drop 30% in the next week.

Strong stocks can still perform

Even in historical bear markets, there are the occasional winners that have persevered and protected their downside or even increased marginally.

While not easy to find, the ability to pick a strong, non-cyclical stock such as AGL Energy Ltd (ASX: AGL) in the Energy sector or Woolworths Ltd (ASX: WOW) in Consumer Staples could protect your capital even as other head for the door.

While no one has the crystal ball to predict the future, I’m a firm believer in the old “time in the market” adage, and I’ll be sitting tight in the hope of further capital gains over the next 12–18 months.

For a high-risk, high-reward growth play, this boutique ASX cannabis stock could be in the buy zone in the second half of the year.

One ASX Stock For An Estimated $US22 Billion Marijuana Market

A little-known ASX company just unlocked what some experts think could be the key to profiting off the coming marijuana boom.

And make no mistake – it is coming. To the tune of an estimated $US22 billion.

Cannabis legalisation is sweeping over North America, and full legalisation arrived in Canada in October 2018.

Here's the best part: we think there's one ASX stock that's uniquely positioned to profit immensely from this explosive new industry... taking savvy investors along for what could be one heck of a ride.

AND, this is the first time The Motley Fool Australia has EVER put a BUY recommendation on a marijuana stock.

Simply click below to learn more on how you can profit from the coming cannabis boom.

Click here to find out more

Motley Fool contributor Kenneth Hall has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of AFTERPAY T FPO. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

FREE REPORT: Five Cheap and Good Stocks to Buy now…

Our Motley Fool experts have FREE report, detailing 5 dirt cheap shares that you can buy today.

One stock is an Australian internet darling with a rock solid reputation and an exciting new business line that promises years (or even decades) of growth… while trading at an ultra-low price…

Another is a diversified conglomerate trading near a 52-week low all while offering a 2.7% fully franked yield…

Plus 3 more cheap bets that could position you to profit over the next 12 months!

See for yourself now. Simply click the link below to scoop up your FREE copy and discover all 5 shares. But you will want to hurry – this free report is available for a brief time only.