Bears - Most Since 2013

It counters the volatility in the stock market and the flattening of the yield curve. Also it is pushing the Fed to hike rates in December and possibly hike them multiple times in 2019.

I think the Fed’s hikes this year still haven’t had their full effect on core inflation. However, the Fed might disagree that it has done enough and hike further next year.

Powell has stated that he doesn’t care as much about the yield curve as he does about where the Fed funds rate is in relation to the neutral rate. For example, if the yield curve were to fully invert this week, he would still want to hike rates because the Fed funds rate is below all the FOMC members’ estimates for the neutral rate.

One more hike would put us at the low end of the estimates for the neutral rate. Some FOMC members with high estimates will need to take those down if the economy starts to weaken more in 2019.

Bears - Labor Market Not Full

It’s in the Fed’s DNA to hike rates when the labor market is at full employment.

The chart below goes against their stance to hike rates if you assume the Fed needs to hike when there’s little slack in the labor market.

As you can see, 20.8% of unemployed workers have been unemployed for 27 weeks or longer. That’s above the previous cycles’ troughs which were 15.9% in October 2006 and 10.0% in May 2001 (during the 2001 recession).

This rate has over one year to fall before it signals the labor market is completely full.

(Click on image to enlarge)

Bears - Conclusion

Investors are starting to get nervous, especially retail traders.

Usually, it’s good time to buy when that occurs.

There won’t be a recession in the next 6 months. However, the Fed is about to invert the yield curve which means a recession is likely in about 1.5 years. Is this selloff the market pricing in a recession very early?

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Moon Kil Woong 1 year ago Contributor's comment

I think the selloff has more to do with the concerns over trade wars and the global economy more than the Fed's actions. This is just that, a selloff at this point, not a bear market as many are hinting at.