Following on the heels of “Mind your duration,” I explore the broad implications for the stock market resulting from the interplay between duration risk and recession risk. As a reminder, while stocks do not technically have a measure of duration, the concept of duration risk is directly applicable to stocks. The following quote from “Mind your duration” sets the stage:
Similar to bonds, if the low end of long-term yields is anchored nearby, the dynamic creates the foundation for widespread risk/reward asymmetries across the stock market.
Stock Market “Duration”
Using the SPDR® S&P 500® ETF Trust (NYSE:SPY) as a proxy for the US stock market, we can begin to illuminate the concept of duration as it relates to stocks. In terms of duration, the primary difference between stocks and bonds is the degree of certainty regarding future cash flows. Bond cash flows are contractually well defined, while stock cash flows are highly uncertain.
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