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One good reason to stay bullish on stocks

Stocks could dip further, but here is one good reason for long-term investors to hold on or even rebalance and add more.

Global economic indicators and momentum in stock prices are on the wane, but here is one good reason for holding onto your stocks or even rebalancing to add more: the near record positive slope in the yield curve.

As shown in the chart below, the difference between U.S. 3-month and 10-year bond yields remains highly positive, at just over 3 percentage points. Historically, such gaps are bullish for stocks. It’s usually only when the gap goes negative (short-term rates rise above long-term rates, as in 2006 and 2007), that bull markets end. 

 

Chart 1: U.S. Yield Curve from 2006 to 2011

yield curve2

 Source: Thomson Reuters Datastream via The Boeckh Investment Letter