Dec

23

The attached chart shows weekly historical 10Y-2Y Treasury yields* (which is a measure of the yield curve slope) alongside log SP500 weekly closes, 6/76-present.

After the whip-inflation Volcker period (late 70's-early 80's), the yield curve looks like a tool to reverse recessions and bear markets in stocks. The recent peak 10Y-2Y of 2.69 is the highest since another 2.69 in 8/2003, and the prior maximum was 2.62 in 7/1992. Too little N for inference, but stocks rose for a long time after these peaks, and if nothing else it shows what the FED is trying to whip up.

*(Market yield on U.S. Treasury securities at 2-year, 10-year, constant maturity, quoted on investment basis, Fed data).

Steve Ellison comments:

I ran regressions of the yield curve, which I defined as the difference between the interest rates on the 10-year bond and the 3-month T-Bill, and the subsequent 4-month change in the S&P 500.

From 1962 to 1982, there was a strong positive correlation between the yield curve and the subsequent change in the S&P 500.

ANOVA
                  df     SS         MS     F   Significance F
Regression   1  0.043  0.043  6.76     0.012
Residual     61  0.387  0.006

Total          62  0.430

However, from 1983 to 2009, not only was the correlation non-significant, but the sign changed.

ANOVA
                  df    SS           MS    F    Significance F
Regression   1  0.004  0.004  0.54       0.463
Residual     76  0.618  0.008
Total          77  0.623


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