How Long Before Powell Throws In The Rest Of The Towel?

It was only a few days ago when the stock market celebrated a Trump-Xi tariff delay. And it was only a few days before that when Federal Reserve Chairman Powell flip-flopped on the extent of rate hiking yet to come.

Both of the above-mentioned actualities sent stocks and risk assets soaring higher. And both were expected to serve as tailwinds for a phenomenal December rally.

So how did the Dow lose nearly 1600 points in two days, then recover roughly 700 of them on news of a rate-hike pause? Trouble with the curve.

Indeed, the month began with a recessionary warning. On Monday, when the yield on 5-year Treasuries fell below the yield of 3-year Treasuries, the inversion signified a safety-seeking desire for longer-term maturities.

yield-curve-inverts

Granted, the fact that 3s and 5s have inverted is not particularly telling in and of itself. The big-time curve inversion that analysts and economists look for is when the 10-year note yields less than the 2-year note. Every recession since World War II came after 2s and 10s inverted.

Nevertheless, buyers had already been pulled into equities earlier, alongside a more subdued Fed as well as the perceived easing of trade tensions. When algorithmic trading picked up on a “first-time-since-2007 event,” sell orders began accumulating and, eventually, overwhelmed a lack of additional buying interest.

There’s more.

Participants in the financial markets, including “the computers,” eventually factor in the probable implications of a Fed that stops raising rates. Specifically, a neutral plateau may precede a recession. (See the orange circles below.)

fed-funds-rate-stuff

“There’s no recession in sight,” you argue. In particular, employment indications remain robust.

On the other hand, we are only a few months away from a tenth year of economic expansion. The longest growth periods in U.S. history — 1960s and 1990s — did not journey into an eleventh year. It follows that probability alone implies we are closer to the finale than to a second act.

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ETF Expert is a web log (”blog”) that makes the world of ETFs easier to understand. Gary Gordon, MS, CFP is the president of Pacific Park Financial, Inc., a Registered Investment Adviser ...

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