I am a firm believer of the predictive features of the yield curve. In my The Peter Dag Portfolio I use it to forecast the direction of the economy.
A steepening yield curve is followed after 6-12 months by a stronger economy. A flattening yield curve is followed after 6-12 months by an economic slowdown.
The Hussman Funds website is consistently showing stimulating research. A recent paper by W. Hester discusses how the global yield curve is also correlated to earnings. This is not surprising since earnings depend on economic growth. What makes the paper unique is that Mr. Hester relates the recent shape of the global yield curve to stock sectors.
I have been a firm proponent of using trends in economic growth to select asset classes and stock sectors in particular. The bottom line is if the yield curve is predicting a slower economy and earnings, investors should be in defensive sectors. If the yield curve predicts a stronger economy and earnings, investor should be exposed to aggressive sectors.
I will discuss in detail how sectors are related to business cycles in Pittsburgh on November 13 (for more information please call Larry at 412-741-3674) and at the AAII national meeting in Orlando on November 8-10 (please call 800-428-2244 for more information).
I recommend you read the complete article by Hester on http://hussmanfunds.com/rsi/globalycurve.htm
More on http://www.peterdag.com/.
George Dagnino, PhD
Editor, The Peter Dag Portfolio
Since 1977
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