Monday, May 18, 2009

Yield Curve Slope

As said I was intrigued by CrossingWallstreet comment that "Probably the most fascinating stat is that all of the stock market’s net capital gains have come when the 10-year yield is 65 or more basis points above the 90-day yield (that happens about 70% of the time). The yield curve hasn’t been that positive in 15 months. Anything less than 65 basis points, including a negative yield curve, works out to a net equity return of a Blutarsky. Zero Point Zero."

So I had a closer look at the data. First here is a look at monthly S&P500 performance according to yield curve slope deciles.

Decile Perf
< 0.01 -0.3%
< 0.38 0.4%
< 0.64 0.4%
< 1.00 0.1%
< 1.30 0.9%
< 1.59 2.1%
< 2.11 1.0%
< 2.56 0.4%
< 2.95 0.6%
< 4.42 0.6%

Since April 1953 whenever the yield curve is negatively sloping the average monthly S&P500 perf is negative as well. The best monthly performances occur when the yield curve is sloping between +1.3% and +2.11%.

Using CrossingWallstreet's idea I updated the following chart of cumulative S&P performance. Zero cumulative performance as long as the slope is smaller than 90bp. Will add this consideration in my timing decision going forward.

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