Sunday, December 24, 2017

What is the Yield Curve telling about the equities market?

What is the Yield Curve telling about the equities market?

2017 is coming to a close. It's been yet another good bull year for US equites. US has just announced their 3rd rate hike. The state of US and global economy is considered to be in a good state.  Tightening policy will likely to continue in 2018 at least for US. Many of us are seriously worrying  about high valuation of the equities market. Are we at the edge of the cliff of market crash? It's a good time to look at Yield Curve and compare it with key historical moment.

Thanks to for their dynamic yield curve utility. It's a super tool if we like to have a quick view of yield curve vs the S&P500 index. I have captured screen shots of the yield curve just before market crash in 2000 and 2007 as well as the recovery turn around points in 2002 and 2008 for our study.

The yield curve as of Dec 2017 seems to be pretty healthy. It's flattening but not yet in a highly unreasonable states as in 2000 and 2007. Yield curve is obviously just one of the many references for our anticipation of the state of the economy and the market. However, the current state of yield curve is at least not a worrying factor for me.

Apr 2000

Nov 2002

Jun 2007

Dec 2008

Oct 2012

Mar 2015

Dec 2017

Source: Dynamic Yield Curve