Bonds Have Gone Too Far
Stocks have fallen out of fashion, with investors getting comfy again with bonds. Such is their newfound popularity; bond yields are getting squished, creating an ominous curve in their pattern of returns. The smart money is at a crossroads!
Bonds are the go-to for the defensive investors, offering a safe, fixed income no matter what the geopolitical weather. Given the rough and tumble nature of today’s markets, many have dived for cover in bonds. Perhaps, too many! Bonds have been bid up so high that value for money has been flattened. In comparing the yields of short-term versus long term bonds, an inverted curve suddenly appears. That’s a recession-indicator, and mass stock sell-offs, the worst this year, suggest the market is taking it seriously!
A proper recession is felt at the grass-roots level, in manufacturing production, retail sales, consumer confidence, and declining GDP growth. If the market isn’t optimistic about the future of those things, an inverted yield curve is bound to show up! But what does the market know, eh? Driven by mass-market migrations in sentiment, the inverted curve has predicted eleven out of the last eight recessions. Are investors seeing patterns that don’t exist?
The man market players look to now is Fed Chair Jerome Powell, who has the power to help out stocks by lowering interest rates. President Donald Trump, somewhere amongst the crowd, called this situation “CRAZY,” and the Fed Chair “clueless.”
Stock and bond prices, and thus their yields, are just predictions about the future. They’re a tinted lamination on top of reality, proved right as often as they’re proved wrong. The biggest danger to the economy could be the fraying ties between economic predictions and economic realities. Once emotions get involved, we’ve had it! Could we talk ourselves into a recession?