There are some things we know to be (mostly) true. Inflation is coming down. The Fed is closer to the end of its aggressive rate hikes. Growth is slowing. And earnings are likely to decline in Q1 (after a decline in Q4). But what don’t we know? What are the potential unknowns that could trip the market up? Three things to consider.
"Interest Rates / Bonds"
Yields Plunge – The Signal It’s Sending
Bond yields are falling. And fast. The question is why? In short, the bond market is now pricing in a recession. It sees growth stalling… and believes the Fed will embark on rate cuts in the second half. But have equities got the memo? Not yet. They are trading at close to 19x forward earnings… as big tech drags it higher. From mine, I think the market feels vulnerable here.
A Great Quarter… Can it Continue?
The S&P 500 recorded an impressive gain of ~7% for the first quarter. Optimistic on the resolution of the banking crisis – and prospects of Fed rate cuts in the second half – the bulls have regained their mojo. But this raises a question: why would the Fed cut rates? It’s not because inflation is under control. For example, could it be because the economy needs assistance? Stress in the financial system? A credit event? If so, is that a good thing? Here I also look at the monthly chart – it deserves our attention.
Yield Curve: Recession Dead Ahead
2-year bond yields are cratering. Rarely – if ever – have we seen them fall 150 basis points in just three weeks. This signals the bond market sees aggressively rate cuts from the Fed this year. But what would cause this? A recession? Some kind of credit crisis? I can tell you it won’t be because inflation is back to the Fed’s target of 2%. What’s more, the yield curve has steepened sharply. This isn’t good… and if history is any guide… a recession is likely within 12 months.
For a full list of posts from 2017…