---
title: Lord Abbett Explores Yield Curve Effect on US Stocks
description: Lord Abbett considers the relationship between the US Treasury Yield Curve and equity prices. Is a flattening yield curve an indicator of declining stock prices
image: http://www.letsassemble.com/hubfs/MM_Logo_Images/Lord_Abbett_Market_Commentary.png
---

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# Lord Abbett Explores Yield Curve Effect on US Stocks

Posted by [ WrapManager's Investment Policy Committee](https://www.letsassemble.com/wealth-management-blog/author/wrapmanagers-investment-policy-committee)  
 November 23, 2017

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In part one of a two-part *Market View*, Lord Abbett explored investor concerns about the ongoing flattening of the yield curve. A flat two-year–10-year U.S. Treasury yield curve suggests an expectation of falling short-term interest rates, or an extended period of very low short-term rates, corresponding to presumptions of a weak U.S. economy and disappointing corporate earnings. In turn, those developments would have negative implications for U.S. equity prices.

To address those concerns, Lord Abbett turned to Giulio Martini, Lord Abbett Partner and Director of Strategic Asset Allocation for his views on the yield curve and its relationship to economic growth, corporate profits, and, ultimately, U.S. equity prices.

Read on for an introduction to Martini's analysis, or [view the entire document here](https://www.letsassemble.com/hubfs/MM_Commentary_PDFs/lord-abbett-yield-curve-explained-nov-2017.pdf).

### **Is There a Relationship Between the Yield Curve and U.S. Equity Prices?**

In the ensuing days since Part 1 was published, the slope of the U.S. Treasury yield curve flattened even further, to 64 basis points, as of November 16. The curve remains near its flattest since September 2007.

A flattening yield curve doesn’t always mean that expectations for future short-term rates are being revised downward. That’s because there are two distinct components to the yield curve: *risk-neutral yield*, which represents market expectations of future short-term rates, and the *term premium*, which represents market uncertainty around those expectations. We showed that the majority of the recent flattening of the yield curve is estimated to have been due to a flattening of the term premium as opposed to a decline in the risk-neutral yield. According to Martini, a flattening of the yield curve due to declining relative long-term uncertainty should have very different implications for the expected growth of U.S. gross domestic product (GDP), rather than a decline due to falling expectations about future short rates.

We also previously noted that many investors hold to the notion that a flattening yield curve signals future economic weakness. But Martini says that the relationship between changes in short-term interest rates and changes in U.S. GDP) growth and corporate earnings appears to have evolved over time. 

Why is that? In answer, we think a look at recent U.S. economic history is in order. Martini says financial deregulation that culminated with the effective bypassing of interest-rate ceilings by U.S. banks in the late 1970s “broke the linkage between the slope of the yield curve, GDP growth expectations, and stock returns.” Prior to that, the U.S. Federal Reserve’s control over short-term rates, combined with interest-rate ceilings imposed on checking and savings accounts, gave policymakers a very effective mechanism for controlling the business cycle. This led, Martini says, “to a very predictable linkage between the slope of the yield curve and future economic and corporate earnings growth.”

The tight relationship that existed before 1980 is why many analysts and investors continue to believe that a flattening yield curve is a valuable leading indicator; but, as Martini notes, “the mechanism that created that relationship disappeared after deregulation.” Thus, Martini says, “a flattening of the risk-neutral curve shouldn’t be taken as a negative signal for stock prices.”

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For additional details, about the relationship between the U.S. Treasury yield curve and U.S. stocks, [review the complete article from Lord Abbett](https://www.letsassemble.com/hubfs/MM_Commentary_PDFs/lord-abbett-yield-curve-explained-nov-2017.pdf), or read Lord Abbett's post about [Retirement Plan Limits for 2018](https://www.wrapmanager.com/wealth-management-blog/2018-retirement-plan-limits-lord-abbett). 

Contact us to learn more about  money managers such as [Lord Abbett and Company, LLC](http://www.wrapmanager.com/money-manager-research/lord_abbett_company_llc),  or to consult with a knowledgeable Investor Consultant about your retirement plan. Give us a call at 1-800-541-7774 or [email us](http://wealth@wrapmanager.com). 

[Download the Full Commentary Here](https://www.letsassemble.com/hubfs/MM_Commentary_PDFs/lord-abbett-yield-curve-explained-nov-2017.pdf)

[Get Free Performance Reports about Lord Abbett & Company, LLC](http://www.wrapmanager.com/money-manager-research/lord_abbett_company_llc)

 

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