The Law of the Medes and Persians

The article argues that investors should revisit long-held rules when structural change and recent evidence weaken their reliability.

• The US 10-year/2-year yield-curve inversion preceded all 10 recessions in the historical sample within 24 months, but the July 2022 inversion has lasted more than four years without the expected recession.
• Earlier recessions in 1945, 1948–49 and 1953–54 were not preceded by an inversion, while other inversions produced false or excessively early signals.
• The Fama-French HML value factor returned a 5% CAGR from 1926 to 2006 but an annualised -2% equivalent return thereafter, suggesting that traditional valuation ratios may be less effective for newer business models.
• SpaceX illustrates the problem: it trades at 110x forward earnings but 15x expected 2030 earnings, implying more than 600% earnings growth in just over three years and a small probability of a very large payoff if the space industry develops.
• Positive stock-bond correlation can reduce bonds' equity-hedging value, although the article notes that the current regime differs from the negative-correlation period that dominated the first two decades of the 21st century.

Takeaway: Investors should still monitor yield curves, valuation and stock-bond correlation, but treat them as imperfect signals and allow for changed economic structures, emerging business models and the potential benefits of bond carry.