Stock market performance has been mixed during periods when the Treasury yield curve warns of a recession, but there are stocks that have performed consistently well during these times, Trivariate Research has found. The firm studied periods of yield curve inversion going back to the 1970s. The stock market in this cycle has started worse than eight previous events, but it has bounced back. The yield curve is inverted when shorter duration yields trade above those for longer duration government bonds. When reversed, it is seen as a recession warning. A commonly watched spread between the rates on the 2-year note and the 10-year note only briefly turned negative this spring, meaning the 2-year rate was higher than the 10-year. Then it reversed again in July, and has continued to do so ever since. After the initial inversion in previous cycles, stock market returns were mixed for the first six months, after which the market typically performed well. Returns were negative a year later only twice – after the inversions in September 1980 and February 2000. “The strong rally so far since mid-June has largely offset the initial sell-off after the inversion, but our assessment is that this trade more on positioning and sentiment than any underlying fundamental strength,” Trivariate analysts led by Adam Parker said in a note. . What to buy But the firm sees an opportunity for investors in the type of stocks that have consistently outperformed in previous periods. “In the last 25 years, when the yield curve inverted, value growth stocks and high quality stocks are lagging behind junk,” Trivariate said. Utilities, energy, healthcare and consumer staples were the best performing sectors during yield curve inversions, while technology, consumer staples and materials were the worst performers. “So far this cycle, utilities are the only sector up in absolute terms, and communications services, financials and materials have underperformed,” according to Trivariate. “Every sector is double-digit worse this cycle than the average historical cycle.” Trivariate screened for value stocks from the bottom half of quality sectors that typically exhibit relative outperformance during yield curve inversions. Five of these companies are HCA Healthcare, Occidental Petroleum, Kraft Heinz, Cheniere Energy and Walgreens Boots Alliance. HCA shares are down more than 16% for the year, but they are up 27% in the third quarter. Occidental Petroleum, meanwhile, has more than doubled in 2022 thanks in part to a rise in oil prices. Cheniere has also received a boost from higher energy prices, gaining 64% year-to-date. Kraft Heinz has outperformed this year, rising 5.6% this year. However, Walgreens is down 27% in that time. Some of the inversions since 1978 lasted more than a year. Trivariate expects this to be a longer period due to elevated inflation. The consumer price index, which rose 8.5% in July, may remain high due to the impact of rising rents, it noted.