Chart of the Week

Stocks: Don't Fear the Flattener

Written by: Global Thought Leadership | January 31, 2019

Chart courtesy of ClearBridge Investments.  Data from 1962 to Dec. 31, 2018.  Source: ClearBridge Investments, Federal Reserve, S&P, Bloomberg, FactSet. * Note: Please see details in the Disclosures section of this document. Past performance is no guarantee of future results. Indexes are unmanaged, and not available for direct investment. Index returns do not include fees or sales charges. This information is provided for illustrative purposes only and does not reflect the performance of an actual investment.


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.  

More from ClearBridge about the prospects for recession


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.



IMPORTANT INFORMATION: All investments involve risk, including loss of principal. Past performance is no guarantee of future results. An investor cannot invest directly in an index. Unmanaged index returns do not reflect any fees, expenses or sales charges.

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Forecasts are inherently limited and should not be relied upon as indicators of actual or future performance.

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