Yield Curve Continues To Flatten. A Bullish Sign For The Stock Market
The Treasury yield curve continues to flatten. The 10 year yield – 2 year yield is now at 0.39%. Or as the bears would have you believe, “the Fed is about to end the economy and stock market”.
Facts and data disagree.
This is the first time in the current economic expansion cycle in which the yield curve flattened to 40 basis points (0.4%). As you can see, the yield curve still needs to flatten a lot more before a recession and bear market begins.
The yield curve needs to invert (i.e. 10 year – 2 year yield is below zero) before you get a bearish sign.
Here’s the data to prove it.
Here’s what happens next to the S&P 500 when yield curve reaches 0.4% for the first time in each economic expansion cycle.
Click here to download the data in Excel.
Let’s look at the historical cases in detail.
May 31, 2005
The stock market rallied higher over the next 2 years after the yield curve flattened to 40 basis points.
December 2, 1994
The stock market rallied higher over the next few years after the yield curve flattened to 40 basis points.
July 26, 1984
The stock market immediately started to rally after the yield curve flattened to 40 basis points.
August 18, 1980
The stock market rallied for 3 more months after the yield curve flattened to 40 basis points.
October 12, 1977
The stock market fell a little more after the yield curve flattened to 40 basis points, but then it surged.
March 28, 1973
The stock market was already in a bear market when the yield curve flattened to 40 basis points.
October 24, 1964
The stock market rallied for more than a year after the yield curve flattened to 40 basis points.
Conclusion
As you can see, the yield curve is still sending a medium-long term bullish sign for the stock market. It says that:
- The stock market will probably trend higher for another year or two, after which…
- The yield curve will invert and an equities bear market will start.
There is only 1 bearish case: 1973. That bear market case was caused by OPEC’s oil embargo, which completely froze the U.S. economy and led to a sharp recession. A repeat of that historical scenario is unlikely today. The U.S. is increasingly energy independent, which means that the U.S. economy and stock market isn’t particularly beholden to foreign interests.
All the other cases are bullish.
Fascinating article. However, your example of 1980 shows only three months of stock appreciation after the yield curve reached 40 basis points. While the other examples were showing years of appreciation, 1980 is the fly in the ointment. Nothing is guaranteed! The addition of a tariff war could bring on problems sooner. I don't think Trump is just talk this time. He is mired in the weeds created by his own stubborn doctrine.