Investors seek a bad indicator and a less likely recession

This frightening warning of the bond market regarding a recession might not be the right thing to watch after all.

Source: Goldman Sachs

Another important factor to note is that credit spreads did not increase significantly last week. Goldman's strategists noted that these spreads generally react early to the risk of a recession.

The strategists said they followed the reverse part of the curve and found that it was still weak compared to the last four recessions, where more than 70% of the curve was reversed. In recent months, the 2-year note yield exceeded the 3 and 5-year note yield and outperformed the 7-year return.

Investors worry about inverting the yield curve because this is not a good sign for the economy in general. Banks tend to borrow in the short term and lend to businesses and consumers for longer periods. Loans become more difficult when short-term rates are higher than long-term yields.

Source: Goldman Sachs

Inventories and other risky assets can work well with a flat yield curve, which reinforces the opinion of Goldman's strategists that returns will be positive for equities despite the lack of earnings growth and the environment macro-economic less positive.

Strategists note that significant market pullbacks began once the yield curve began to intensify, after being reversed.

"Of course, this cycle has been different because of the extremely low level of interest rates, so historical results may not succeed directly, but we expected the risk of recession to remain relatively low, even in an environment characterized by "low returns" and high volatility, they noted.