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Implications of inverted yield curve for equities

More good stuff from Mike Panzner: 

"On the heels of this morning's weaker-than-expected jobs report, the U.S. treasury yield curve has flattened, with the difference between 10-year and 2-year treasury note yields falling by 2 basis points to a 4-year low of 36 basis points.

This continues the trend that began on July 29, 2003, when the spread peaked at a 30-year high of 275 basis points. The continuing decline has recently led to increasing speculation that the yield curve will soon become "inverted."

Interestingly, while some argue that an economic environment where shorter-term yields are higher than longer-term yields is bad for stocks, the historical record is mixed.

In the seven periods over the past 30 years when the spread between 10-year and 2-year notes has been negative for the most part of a month or more, the S&P 500 has risen four times and fallen three.

The biggest gain occurred in a near 6-month span that ended in June 1989, when
the S&P 500 Index rose by 15.70%. The largest loss was seen in 2000, when the
measure fell by 5.32% from February to December.

For what it's worth, a quick read of the pattern over the past three decades
does suggest that when the yield curve remains inverted for an extended period
of time, equity returns turn out to be less than stellar.

click for larger chart

Period when 10-year
/2-year spread has
been negative           S&P 500 Gain/Loss

8/18/78 - 5/1/80            +0.70%
9/12/80 - 11/5/81          -1.59%
1/14/82 - 7/16/82          -3.87%
1/13/89 - 6/29/89           +15.70%
8/11/89 - 10/11/89         +3.55%
  6/9/98 - 7/9/98            +3.60%
  2/2/00 - 12/28/00         -5.32%

Saturday, June 04, 2005 | 10:30 AM | Permalink | Comments (4) | TrackBack (0)
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Comments

What's the S&P500 and Dow performance in the twelve months trailing the start of an inversion of the yield curve? I believe that is a much more interesting data point than the performance during the inversion.

Posted by: jjr | Jun 4, 2005 5:10:15 PM