The Bottom Line
- An inverted yield curve – where near-term yields are higher than longer-term yields – is widely accepted as a harbinger of recession 6 to 18 months later.
- But history suggests it could be a mistake to move away from stocks when the curve shows signs of flattening.
- ClearBridge Investments Investment Strategist Jeff Schulze notes that since 1962, the S&P 500 has delivered meaningfully positive annualized returns both 12 months and 24 months following periods where the yield curve slopes up, but only by a small amount1.
- Even when the yield curve has actually inverted (represented by the pair of bars at the far left), net returns were still greater than zero.
- For now,2 yield curve steepness is a little over 31 basis points, up from about 15 on January 3.
- If history is a guide, prospects for positive equity returns could be better than many anticipate.
All data Source: Bloomberg, January 31, 2019, unless otherwise indicated.
* Note to the chart: Data from 1962 to Dec. 31, 2018. Source: Federal Reserve, S&P, Bloomberg, and FactSet. Note: Forward 12 and 24-month annualized returns for S&P 500 based on level of 3-Month vs. 10-Year yield curve and change in 3-Month vs. 10-Year yield curve over prior 3 months during periods where the yield curve flattened over the prior 3 months.
1 Specifically, when there is 0 to 50 basis points' difference between the 3-month U.S. Treasury T-Bill and the 10-year Treasury note.
2 January 31, 2019, 10:00 AM ET
The yield curve is the graphical depiction of the relationship between the yield on bonds of the same credit quality but different maturities.
A basis point (bps) is one one-hundredth of one percent (1/100% or 0.01%).
The S&P 500 Index is an unmanaged index of 500 stocks that is generally representative of the performance of larger companies in the U.S.