SP500

S&P 500 Performance After Yield Curve Inversions

The SP500 typically experiences a decline within a range of 6 to 18 months after reaching the low point of the yield curve. The magnitude of these declines range approximately from 20% to 60%.

Dollarcontext

13 Jul 2023 — 3 min read

The yield curve has been an accurate indicator to predict recessions. In addition, there has always been a strong correlation between recessions and S&P 500 downtrends. Not surprisingly, there should be a significant connection between yield curve inversions and stock market performance as well.

Today we’re going to discuss different timing strategies to buy or sell the S&P 500 when the bond market, specifically the 10-2 year treasury yield spread, displays an inversion.

Overview

We’ll examine the S&P 500's performance during the past five instances of yield curve inversion by presenting the following two charts for each period:

S&P 500 chart where the periods of inversion are indicated by blue shaded areas while subsequent market downtrends are represented by orange shaded areas.
10-2 Year Treasury Yield Spread

Historically, the stock market has shown strong performance either during the first half or throughout the entire duration of a yield curve inversion.

The S&P 500 typically experiences a decline after a period spanning from 6 to 18 months from the lowest point of the yield curve. The magnitude of these declines ranges approximately from 20% to 60%.

August 1978–July 1982

Performance of the S&P 500 after the yield curve inversion in August 1978 — S&P 500 during yield curve inversions (August 1978 - July 1982)

- The inversion begins in August 1978
- Yield curve bottomed in April 1980
- S&P 500 decline begins in November 1980
- Bottom of the inversion to the onset of the S&P 500 downtrend: 7 months
- S&P 500 decline: 39.7%

10-2 Year Treasury Yield Spread Throughout the Period Spanning from 1978 to 1982
Source: Federal Reserve Bank of St. Louis

December 1988–October 1989

Performance of the S&P 500 after the yield curve inversion in December 1988 — S&P 500 during yield curve inversions (December 1988 - October 1989)

- The inversion begins in December 1988
- Yield curve bottomed in April 1989
- S&P 500 decline begins in May 1990
- Bottom of the inversion to the onset of the S&P 500 downtrend: 14 months
- S&P 500 decline: 20.3%

10-2 Year Treasury Yield spread throughout the period spanning from 1988 to 1989
Source: Federal Reserve Bank of St. Louis

February 2000–December 2000

Performance of the S&P 500 after the yield curve inversion in February 2000 — S&P 500 during yield curve inversions (February 2000 - December 2000)

- The inversion begins in February 2000
- Yield curve bottomed in April 2000
- S&P 500 decline begins in September 2000
- Bottom of the inversion to the onset of the S&P 500 downtrend: 6 months
- S&P 500 decline: 49.7%

10-2 Year Treasury Yield spread throughout 2000
Source: Federal Reserve Bank of St. Louis

February 2006–April 2007

Performance of the S&P 500 after the yield curve inversion in February 2006 — S&P 500 during yield curve inversions (February 2006 - April 2007)

- The inversion begins in February 2006
- Yield curve bottomed in December 2006
- S&P 500 decline begins in October 2007
- Bottom of the inversion to the onset of the S&P 500 downtrend: 11 months
- SS&P 500 decline: 58%