Grading on a Curve (the Yield Curve, That Is)

weekly market commentary 9/29/14

Kids are back in school and have started taking tests. Some of those tests are graded on a curve, meaning that students are graded based on their score relative to the rest of the class. In terms of stock market indicators, one that gets an A+ and ranks at the top of its class is another type of curve — the yield curve. In fact, this indicator receives a perfect score (seven for seven) in signaling recessions over the past 50 years.

The goal for all investors is to find indicators to help anticipate big down moves, and the yield curve has been about as good as it gets on that score. One of the Five Forecasters featured in our Mid-Year Outlook 2014: The Investor’s Almanac Field Notes, the yield curve passes the test as an indicator that has consistently signaled increasing fragility of the U.S. economy and a transition to the late stage of the economic cycle, an oncoming recession, and ensuing market downturn.

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