WWRR Vol.2.015

2019 Global Economic and Market Outlook
Break the change in yield into percentiles, where each percentile is based on the trough-to-peak
increase in yield.
Take the first instance of yields crossing through selected percentiles (namely 0, 10, 25, 50, 75,
90, and 100) and extract the level of equity prices (S&P 500) at this point in time.
Decompose the change in equity prices over the upswing by comparing the relative level of
equities as yields move between the yield percentiles above (i.e. 0-10%, 10-25% etc.).
Fig 43 Seven recent episodes are broadly comparable to
the current cycle, although they are highly diverse
Recent Yield Cycles vs. the Current Cycle
Per cent
16
Index
3000
Fig 44 As a summary device, we look at how equities have
moved as yields progressed through various thresholds
Per cent
120
US Yields and Equity Prices
October 1998 yield trough to subsequent peak
Per cent
60
90-100%
14
12
10
8
6
4
2
10-year
government bond
yield (LHS)
S&P500 price
index (RHS)
*Shaded areas indicate recessions
0
80 85 90 95 00 05 10 15
Source: NBER, Macrobond, Macquarie Macro Strategy.
2500
2000
1500
1000
500
0
100
80
60
40
20
0
*Dashed lines map changes in yields to changes in equity prices.
-20
-10
05/10/98 05/02/99 05/06/99 05/10/99 05/02/00
Source: Macrobond, Macquarie Macro Strategy
75-90%
S&P500 price return 25-50%
since yield trough (RHS)
Change in 10-year bond yield
since trough, per cent of
trough-to-peak move (LHS)
50-75%
10-25%
0-10%
50
40
30
20
10
0
The results of this exercise are summarised the figure below. While there are many key
takeaways, we believe the following are most important:
From the trough in yields to the subsequent peak, equities have increased on five out of seven
occasions, with the increase varying between 12 and 51%.
Equity increases have not been contained to a particular part of the cycle – on average, equities
increased as yields progressed through each of the yield ranges.
While the results are predominantly driven by the four cycles prior to the current one, much of
the increase in equities comes towards the last quarter of the yield cycle.
Evidently, the overwhelming majority of historical evidence suggests that equities should push
higher over the remainder of the yield upswing. This is consistent with our expectation for the
increase in yields to be accompanied by robust nominal GDP growth, helping to push both
corporate earnings and equity prices higher (as opposed to the sharp downturn that many fear).
Fig 45 Equities have risen during yield upswings, particularly near the end of the cycle
Per cent
70
60
50
S&P500 Price Changes During Yield Upswings*
Identified by date of trough in 10-year government bond yield
0-10% 10-25% 25-50% 50-75% 75-90% 90-100% Total
40
30
20
10
0
-10
-20
-30
*Purple bars, for example, refer to the change in S&P500 prices (relative to their price at the
beginning of the yield upswing) as bond yields move from 50% to 75% of the way to their peak.
May 1983 Aug 1986 Oct 1993 Oct 1998 Jun 2003 Dec 2008 May 2013 Mean
Source: Macrobond, Macquarie Macro Strategy.
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