Independent Strategic Thinking
Another Historical Perspective
Back to the future
Given the renewed uncertainties facing financial markets it is worth taking another longer-term view at the relationship between equity prices and short- and long-term bond yields. Going back over 25 years we see a similar pattern at critical junctures of rising short-term yields that eventually exceed rising long-term yields (i.e., inverted yield curve) followed by sharp drops in bond yields and then equity prices. This occurred in 2000 and 2008 at the end of the tech and housing bubbles, respectively. A similar process was interrupted at the beginning of 2020 by the pandemic but is currently recurring – with rising short-term yields close to exceeding rising long-term yields.
If history is any guide, equity prices are currently poised to decline significantly further reflecting the Fed's policy reversal and recent interest rate behavior - marking the end of the pandemic bubble fueled by highly expansionary fiscal and monetary policy.
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