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The yield curve has a dramatic impact on equity prices. The steeper the yield curve, the better stocks perform.

I looked at the S&P 500 data along with the yields on the 90-day and 10-year Treasuries. Since 1962, the yield curve has been negative (i.e., the 10-year minus the 90-day) for a total of five years. In that time, the market has lost about 37%.

In fact, the S&P 500 is net flat (not including dividends) for all the periods when the yield curve is less than 78 basis points, which is about one-third of the time. The yield curve hasn't been that wide since last November.

Interestingly, the market also does poorly when the yield curve is at its steepest. At 286 basis points, the S&P 500 starts falling. Perhaps the market senses that the yield curve is about to turn around.

If you want to geek out on the data, here's my spreadsheet. I used weekly data, and I compared the S&P's return to the prior week's yield curve.

Posted by edelfenbein at August 15, 2006 9:49 AM