Yield Curve: The Bull has a Ways to Run

The post financial crisis bull market has been the 4th longest bull market in US history and has seen the S&P 500 recover 206.5% from its March 2009 trough through August 2014. As equity investors’ portfolios grow, however, so do their fears that a major market correction could be around the corner. The CAPE ratio was a hot topic amongst investors last month as it showed the market is overvalued compared to historic norms. Many pointed to this as a sign that a correction is due.

Problem is, the CAPE ratio doesn’t predict market corrections. It just attempts to measure the valuation of the market compared to its historic average and has significant room for improvement at that.

These investors should have been pointing to the yield curve to evaluate the risk of a major market move downwards. Our Director of Research, Alex Shen, released a report this week highlighting the yield curve and its history of predicting economic distress.

I urge you to download and read the repot here. Read the highlights after the bump:

  • The yield curve (term spread) is the difference between the long term treasury interest rates and short term treasury interest rates.
  • During normal times, long term rates are higher than short term rates.
  • Yield curve inversions have preceded recessions 7 out of 7 times since 1950.

Inverted Yield Curve Preceding Recessions

  • Yield curve inversions occur before other market signals like VIX.

Yield Curve Signal Ahead of VIX

  • The term spread today is a healthy 2.39% compared to the average during the 2000s of 1.99%, well above the level that could spell trouble.
  • Conclusion: The Bull Market still has a ways to go.
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