The conditional influence of term spread and pattern changes on future equity returns

We extend previous research examining the relation between interest rates and equity returns using a multivariate analysis of covariance model with a dynamic yield curve and conditioned term spread. We find yield pattern changes predict economic equity returns; that the long end-of-yield curve is a strong determinant factor; and, in contrast to previous research, we find no relation between a decrease in the short rate and equity returns. However, the conditional term spread captures a significant positive return indicating that the degree of decline in the short rate relative to the long rate is of more importance than the term spread alone.