This post takes a look at:
– The main concerns market players are contending with presently
– The yield curve
– How to predict a bear market and recession
– The “Trade War”
– Current state of play in markets
“You only need three pieces of information to predict with a high level of confidence whether the US economy is going to enter recession AND the S&P500 is going to enter a bear market.”
The markets
We are mid-way through the year and 2018 is shaping up to be a very different year for the stock market than 2017.
Last year pretty much everything went up…all year. It really was a “rising tide lifts all boats” type of scenario. 2018 has been rather more challenging. For a start, the overall market has been more volatile. Further, several sectors within the market have been performing quite poorly since early in the year. –Consumer staples, financials and industrials sectors spring to mind as examples.
To be fair, there is a long list of worries confronting investors – however this is a good sign the top of the market is not yet in.
Chief among investor concerns right now is the “Trump Trade War”. Then we have a bunch of other worries, including:
The flattening of the yield curve
the Fed raising interest rates
the Fed shrinking its balance sheet (via the process of quantitative tightening or QT)
the sustainability of current debt levels; and
signs that synchronized global growth may be de-synchronising.
The Yield Curve
Let’s take a closer look at the yield curve, which is a major talking point presently.
The yield curve simply compares the yield on 2-year US Treasuries with 10-year yields. In a normal environment, 10-year yields are higher than 2-year yields, reflecting something known as “term premium”.
The reason the yield curve is now a hot topic is because the yield curve is very “flat” and there are fears that it may soon “invert”.
The yield curve is described as flat when 2-year yields and 10-year yields are very similar. It is said to be inverted when 2-year yields are higher than 10-year yields.
The yield curve has inverted ahead of every recession over the past 40 years, hence the large amount of attention it is receiving currently.
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