Yield Curve Shifts, Part 2: The Implications of Bull Steepening for Stocks
This article, written by Michael Lebowitz, delves into the concept of bull steepening yield curve environment and its implications for economic growth and Federal Reserve policy. The first part of the article discussed the four main types of yield curve shifts and their implications for the economy and Federal Reserve policy.
Correlation of Yield Curve Shifts with Stock Performance
Yield curve shifts tend to correlate with different stock performances. As the chances of a prolonged bull steepening increase, it becomes important to understand how various stock indices, sectors, and factors have performed during similar yield curve movements.
Reducing Losses with Yield Curve Analysis
Stocks usually trend upward for a longer period than they trend downward. However, during the relatively short periods where longer-term bearish trends persist, investors are advised to take steps to reduce their risks and limit their losses. An active approach can put you in a better position than you might have been otherwise. Moreover, when the market resumes its upward trend, you will have sufficient funds to purchase stocks at lower prices and better risk-return profiles.
Recent Bull Steepening History
The graph below charts the 2- and 10-year yields and the 2-year/10-year yield curve. It also highlights periods of persistent bull steepening, which are defined by the curve’s movement and the consistency of the trend. To qualify, the yield curve had to be increasing, with 2-year and 10-year yields moving lower for 20 weeks or longer. Additionally, at least 80% of the weeks had to be in the bullish steepening trend.
Bull Steepening Cycles and Stock Performance
After defining the periods, various stock indices, sectors, and factors were studied to assess their performance during these timeframes. Bull steepening trades typically occur when the economy is slowing, and anticipation of Federal Reserve rate cuts grows. These characteristics aptly describe the current period.
Expectations and Past Performance
While it's tempting to use past performance to predict the future, each of the five periods mentioned above was different. The next persistent bull steepening, whether it's happening now or in the future, will have its own unique characteristics. Past performance may not be a reliable indicator of the future.
Summary
The results of this study are relatively consistent across the five time frames. Therefore, if the current bull steepening continues, it's likely that gold, gold miners, and the more conservative, lower beta sectors will outperform the broader market.
Bottom Line
The study of yield curve shifts and their implications for stock performance is a complex and fascinating subject. The current bull steepening cycle could have significant implications for investors, particularly those invested in gold, gold miners, and more conservative sectors. What are your thoughts on this analysis? Do you agree with the findings? Share this article with your friends and discuss it further. Don't forget to sign up for the Daily Briefing, which is delivered every day at 6pm.
