While reviewing my emails this morning, I came across another interesting article by Denise Chisholm from Fidelity Investments that I believe would be valuable for my investors as part of their ongoing learning journey. Denise is undoubtedly one of the sharpest minds in the field and I have gained a great deal of insight from her work.
Here is a section:
As we enter 2025, the yield curve is un-inverted for the first time in two years. The steepening has been dramatic, if somewhat atypical, given the recent rise in the long end. The belly of the curve has been the last to succumb to a positive slope, but even that has steepened in top decile fashion over the last 6 months. Is that a good or bad thing for stocks in the year ahead?

Nobody knows. There just is not a lot of predictive capability here. Steepening, flattening or inversion of the yield curve doesn’t have a consistent relationship to future earnings growth, multiple expansion, or overall market returns. Except for 2001, when dramatic steepening gave way to large declines in stocks, the odds of a market advance are almost identical in each of the quartiles of prior steepening.

Despite its checkered history with overall returns, the yield curve has been historically more predictive for some economic indicators. If that sounds strange, earnings and economic growth have increasingly diverged since the 2000s (reason: margin expansion) and outside recessions do not always accelerate or decelerate together.
The quicker the steepening of the yield curve, the more likely ISM, a diffusion index, is to advance the year following. The same is true for the LEI (Leading Economic Indicator) and Consumer Confidence (not shown). If you are worried steepness reflects inflationary concerns, it has usually meant the opposite – inflation has only had 14% odds of a reacceleration.
