Equity Investing Through the Cycles


September 7, 2021

I get a lot of questions on when to be a bull on the stock market and when to be a bear on the stock market. As with anything investing, it’s not a cut and dry story, however there are some data points that I use to determine when I feel it’s appropriate to take more risk and when it’s time to take some off the table. Believe it or not I use the “risk free” market to lead me to the ultimate conclusion. The risk adverse market being the U.S. Treasury market, otherwise known as U.S. Government Debt. 

Yes, the old wise bond market is my first point of reference, specifically the U.S. Treasury Yield Curve.  This chart draws a line showing the relationship between yields on different maturities. Basically, from the overnight rate (commonly referred to as the Fed Funds Rate), all the way out to the 30-year treasury. It’s not the numbers that tell the story, it’s the shape of that line that paints the picture here. 

If you’ve read my previous note on the yield curve, then skip this paragraph, otherwise here’s a quick refresher. Below is a great visual available every day on www.worldgovernmentbonds.com that gives you up to date info on the yield curve.

The blue line in the graph above shows the current rate of maturities, the green dotted line is a month ago and the yellow 6 months back. The current shape of this curve is what’s called normalized, due to the longer maturities paying more than the shorter ones. Makes sense right, the longer your invested in something the more you should be rewarded!! An inverted yield curve is a signal of an impending recession, and that data has been pretty accurate over the years, given the last time that happened was Feb 25th of 2020. Right at the stage the market took a 30% tank. 

Digging deeper into this philosophy, the yield curve tells another, what I would argue more compelling story. That is where in the equity markets to invest in. Within any bull market runs, there are pockets of nice up runs, as well as sideways consolidation, and/or pullbacks. Furthermore, there are areas of the market that do better than others, and that is where the true outperformance opportunity lives. We recently completed a study of equity investing through economic cycles since 1999 and found some interesting results correlating to the shape of the yield curve.

Early Economic Cycles are those beginning when equity markets bottom after a recession and ends when the 10-year treasury yield stops rising. A mid cycle period exists when the 10 year is relatively stable and ends when the Fed begins raising short term rates, and a late economic cycle begins when short term rates increase enough to make investors pile into longer term bonds, making the yield curve go flat or even invert. 

I’ll touch on a couple of different indexes to provide perspective. S&P 500 is my go-to for the large cap U.S. market. 

Russell 1000 – Largest 1000 Companies in the U.S. market – Consider Large Cap for this discussion

Russell 3000 – Entire US Stock Market Index – Consider Mid Cap for this discussion

Russell 2000 – It’s the smallest 2000 companies in the Russell 3000 – Consider Small Cap for this discussion

(I know the numbers can throw you off but hey..)

Let’s look at the Returns of these indexes through each cycle.




Our data shows that Early stages lean toward small caps, and then leaning towards larger caps in mid cycles and eventually lowering your overall equity exposure in late cycles. So the million dollar question that all the talking heads will debate is where are we in the cycle. Well, our comparative bond data shows that we are still in an early stage, and this will continue till we start to see the Fed start raising rates. Current reports see that as 18 months away from now. The purpose of telling you this is not to say I’m right and everyone else is wrong, rather to give you some insight on the data I use to form my opinions. Although small caps have underperformed here in the past couple of months, I’m sticking with them till we see the yield curve start to flatten.

Thanks for all the feedback on last week’s note. Health, Wealth, Family, Fun, Serve (my words to live by).  Moving forward I will try to add some images in these notes that touch one of those areas. This week is Health.

Although it’s the view from my backyard, I caught this sunrise as I was heading out for the morning walk.  I’ll do better on pictures next week.

Till then here’s the Buy/Sell.

Mick Graham, CPM®, AIF®

Branch Manager/Financial Advisor at Raymond James in Melbourne, FL

The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of Mick Graham and not necessarily those of Raymond James. Expressions of opinion are as of this date and are subject to change without notice. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Keep in mind that individuals cannot invest directly in any index, and index performance does not include transaction costs or other fees, which will affect actual investment performance. Individual investor’s results will vary. Past performance does not guarantee future results. Future investment performance cannot be guaranteed, investment yields will fluctuate with market conditions.

Investing in small cap stocks generally involves greater risks, and therefore, may not be appropriate for every investor.

The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market.

The Russell 1000 measures the performance of the 1,000 largest companies in the Russell 3000 Index, which represents approximately 90% of the investable U.S. equity market. The Russell 1000 is highly correlated with the S&P 500 and is reconstituted annually on May 31.

The Russell 2000 Index measures the performance of the 2,000 smallest companies in the Russell 3000 Index, which represent approximately 8% of the total market capitalization of the Russell 3000 Index.

The Russell 3000 Index measures the performance of the 3,000 largest U.S. companies based on total market capitalization, which represents approximately 98% of the investable U.S. equity market.

U.S. government bonds and Treasury bills are guaranteed by the U.S. government and, if held to maturity, offer a fixed rate of return and guaranteed principal value. U.S. government bonds are issued and guaranteed as to the timely payment of principal and interest by the federal government. Treasury bills are certificates reflecting short-term (less than one year) obligations of the U.S. government.

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