Why the Slope of the Yield Curve Matters for the Stock Market

by Eddy Elfenbein, Crossing Wall Street

I did some research and found this fascinating stat. When the spread between the 90-day and 10-year Treasury yield is 121 basis points or more, the stock market does much better than when itā€™s 120 basis points or less.

Hereā€™s how it works. Since 1962, the S&P 500 has averaged a 1.42% annualized gain when the yield spread is 120 points or less (that doesnā€™t include dividends). But itā€™s averaged 10.47% per year when the spread is 121 basis points or more. Thatā€™s a big difference.

Over the last 53 years, the spread has been 120 basis points or less about 41% of the time, and itā€™s been 121 basis points or more the other 59% of the time.

The spread has been over 121 points continuously for nearly seven straight years. In fact, the indicatorā€™s only big miss came in early 2008 when it flashed bullish several months too early.

The yield spread is currently 230 basis points. If the 10-year yield stays at this level, then, according to our indicator, we donā€™t have to start worrying about stocks until the 90-day yield gets over 1%. Itā€™s currently at 0.04%.

Hereā€™s the spread over the last 30 years (the black line is at 120 basis points):

image1443

Posted by on November 19th, 2014 at 10:21 am

 

Copyright Ā© Crossing Wall Street

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