Best of the Week
Most Popular
1. Stock Markets and the History Chart of the End of the World (With Presidential Cycles) - 28th Aug 20
2.Google, Apple, Amazon, Facebook... AI Tech Stocks Buying Levels and Valuations Q3 2020 - 31st Aug 20
3.The Inflation Mega-trend is Going Hyper! - 11th Sep 20
4.Is this the End of Capitalism? - 13th Sep 20
5.What's Driving Gold, Silver and What's Next? - 3rd Sep 20
6.QE4EVER! - 9th Sep 20
7.Gold Price Trend Forecast Analysis - Part1 - 7th Sep 20
8.The Fed May “Cause” The Next Stock Market Crash - 3rd Sep 20
9.Bitcoin Price Crash - You Will be Suprised What Happens Next - 7th Sep 20
10.NVIDIA Stock Price Soars on RTX 3000 Cornering the GPU Market for next 2 years! - 3rd Sep 20
Last 7 days
Crude Oil – A Slight Move Higher Has Not Reversed The Bearish Trend - 20th Sep 20
Do This Instead Of Trying To Find The “Next Amazon” - 20th Sep 20
5 Significant Benefits of the MT4 Trading Platform for Forex Traders - 20th Sep 20
A Warning of Economic Collapse - 20th Sep 20
The Connection Between Stocks and the Economy is not What Most Investors Think - 19th Sep 20
A Virus So Deadly, The Government Has to Test You to See If You Have It - 19th Sep 20
Will Lagarde and Mnuchin Push Gold Higher? - 19th Sep 20
RTX 3080 Mania, Ebay Scalpers Crazy Prices £62,000 Trollers Insane Bids for a £649 GPU! - 19th Sep 20
A Greater Economic Depression For The 21st Century - 19th Sep 20
The United Floor in Stocks - 19th Sep 20
Mobile Gaming Market Trends And The Expected Future Developments - 19th Sep 20
The S&P 500 appears ready to correct, and that is a good thing - 18th Sep 20
It’s Go Time for Gold Price! Next Stop $2,250 - 18th Sep 20
Forget AMD RDNA2 and Buy Nvidia RTX 3080 FE GPU's NOW Before Price - 18th Sep 20
Best Back to School / University Black Face Masks Quick and Easy from Amazon - 18th Sep 20
3 Types of Loans to Buy an Existing Business - 18th Sep 20
How to tell Budgie Gender, Male or Female Sex for Young and Mature Parakeets - 18th Sep 20
Fasten Your Seatbelts Stock Market Make Or Break – Big Trends Ahead - 17th Sep 20
Peak Financialism And Post-Capitalist Economics - 17th Sep 20
Challenges of Working from Home - 17th Sep 20
Sheffield Heading for Coronavirus Lockdown as Covid Deaths Pass 432 - 17th Sep 20
What Does this Valuable Gold Miners Indicator Say Now? - 16th Sep 20
President Trump and Crimes Against Humanity - 16th Sep 20
Slow Economic Recovery from CoronaVirus Unlikely to Impede Strong Demand for Metals - 16th Sep 20
Why the Knives Are Out for Trump’s Fed Critic Judy Shelton - 16th Sep 20
Operation Moonshot: Get Ready for Millions of New COVAIDS Positives in the UK! - 16th Sep 20
Stock Market Approaching Correction Objective - 15th Sep 20
Look at This Big Reminder of Dot.com Stock Market Mania - 15th Sep 20
Three Key Principles for Successful Disruption Investors - 15th Sep 20
Billionaire Hedge Fund Manager Warns of 10% Inflation - 15th Sep 20
Gold Price Reaches $2,000 Amid Dollar Depreciation - 15th Sep 20
GLD, IAU Big Gold ETF Buying MIA - 14th Sep 20
Why Bill Gates Is Betting Millions on Synthetic Biology - 14th Sep 20
Stock Market SPY Expectations For The Rest Of September - 14th Sep 20
Gold Price Gann Angle Update - 14th Sep 20
Stock Market Recovery from the Sharp Correction Goes On - 14th Sep 20
Is this the End of Capitalism? - 13th Sep 20
The Silver Big Prize - 13th Sep 20
U.S. Shares Plunged. Is Gold Next? - 13th Sep 20
Why Are 7,500 Oil Barrels Floating on this London Lake? - 13th Sep 20
Sheffield 432 Covid-19 Deaths, Last City Centre Shop Before Next Lockdown - 13th Sep 20
Biden or Trump Will Keep The Money Spigots Open - 13th Sep 20
Gold And Silver Up, Down, Sideways, Up - 13th Sep 20
Does the Stock Market Really "See" the Future? - 12th Sept 20
Basel III and Gold, Silver and Platinum - 12th Sept 20
Tech Stocks FANG Index Nearing Critical Support – Could Breakout At Any Moment - 12th Sept 20
The Tech Stocks Quantum AI EXPLOSION is Coming! - 12th Sept 20
AMD Zen 3 Ryzen 4000 Questions Answered on Cores, Prices, Benchmarks and Threadripper Launch - 12th Sept 20
The Inflation Mega-trend is Going Hyper! - 11th Sep 20
Gold / Silver Ratio: Slowly I Toined… - 11th Sep 20
Stock Market Correction or Reversal? The Jury Isn't Out! - 11th Sep 20
Crude Oil – The Bearish Outlook Remains - 11th Sep 20
Crude Oil Breaks Lower – Sparking Fears Of Another Sub $30 Price Collapse - 11th Sep 20
Inflation by Fiat - 10th Sep 20
Unemployment Rate Drops. Will It Drag Gold Down? - 10th Sep 20
How Does The Global Economy Recover After This Global Pandemic? - 10th Sep 20
The Best Mobile Casino - 10th Sep 20

Market Oracle FREE Newsletter

How to Get Rich Investing in Stocks by Riding the Electron Wave

Stocks Bear Market Indicator Is Off the Mark

Stock-Markets / Stock Markets 2014 Oct 20, 2014 - 05:50 PM GMT

By: Money_Morning

Stock-Markets

Michael E. Lewitt writes: nvestors are taught that bear markets can't occur unless the Treasury yield curve inverts – that is, unless short-term interest rates are higher than long-term interest rates.

And that can only happen if the Federal Reserve raises the Federal Funds rate, which is the short-term rate that the Fed controls.

But that measure may be off the mark this time, and here's why…


New Realities Have Changed the Predictors

In general, a steep yield curve indicates that the economy is growing and is far from recession, and a flattening yield curve suggests that growth is slowing.

But investors would be unwise to rely on this measure alone to convince themselves that the stock market couldn't possibly experience more than a run-of-the-mill correction, which usually means a 10% decline from its high.

But traditional market metrics have been distorted by five years of zero interest rates, three rounds of QE by the Federal Reserve, and additional QE initiatives in Japan, China, and Europe.

The signals being emitted by the yield curve may not be as reliable as they once were in our post-crisis world, a reality we need to acknowledge.

The bigger issue, of course, is how we manage to stay ahead of the data and avoid catastrophic portfolio losses that sap our hard-earned gains.

Here's how we will navigate through the shoals…

Mixed Signals Throughout the Market

Thus far in 2014, the yield curve has flattened significantly but remains very steep.  Year to date, the 2/10 curve (the difference between yields on two-year and ten-year Treasuries) has narrowed from 261 basis points to 186 basis points. While 75 basis points is a lot of flattening, the curve remains steep and far from the levels that would indicate that the economy is anywhere near to entering a recession.

Other economic indicators also suggest that a recession is unlikely. The unemployment rate has dropped sharply and is now under 6%, having logged in at 5.9% in September. GDP growth, which faltered in the first quarter at least in part due to record cold weather, has rebounded and is likely to exceed 3.0% over the second half of the year.

Moreover, for three of the last four quarters, growth has clocked in at better than 3.5% before inflation and close to 5.0% after inflation. That is a long way from a recession.

Other market signals suggest that economic growth could slow down significantly before the yield curve sends its traditional signal that the economy is about to enter a recession.

Let's look at three economic measures and two industry sectors generally considered critical to any analysis of a market's directional change….

Inflation: Traditional inflation measures in Europe and the United States are flashing red.  Markets are currently priced as though U.S. inflation will not reach 2% for the rest of the decade.  In Europe the inflation picture is much more troubling, with deflation posing a serious and immediate risk.

Oil Prices: Oil prices have fallen off a cliff. Brent is now trading at close to $80/barrel, down 25% from its June 2014 high. This is due to slowing demand resulting from faltering economic growth around the world.

Outside of the United States, most of the rest of the world is either in a recession or about to enter one (with the exception of China, which is still growing but slowing). One would expect oil prices to be much higher in view of the geopolitical tensions in the Middle East, but prices have continued to drop even as the threat posed by ISIS has grown.

Oil is the key global commodity, and its plunge is a warning sign that the world may be on the cusp of a major slowdown from which the U.S. would not be immune.

Employment: While the unemployment rate has dropped below 6%, this is only because the labor participation rate has dropped to a nearly 40-year low. The United States has a structural unemployment problem that is leaving almost 100 million people out of the labor force, exacerbating wealth inequality and increasing poverty levels and dependency on government support programs.

Today, 6% unemployment is not the same as 6% unemployment was before the crisis when many more people were part of the workforce.

Transportation Stocks: Airline and trucking stocks have been decimated in recent weeks.  Airlines have been hit, of course, by Ebola fears. Normally, lower oil prices should benefit these groups. The fact that they are selling off suggests that investors are expecting economic growth to drop off sharply. Ebola has the potential to freeze global travel and seriously impair global growth until it is brought under control.

Cyclicals: Other economically sensitive groups have sold off sharply including autos, housing, diversified industrials, machinery/agriculture/construction, and energy. These are among the sectors that have suffered the worst technical damage during the sell-off. If the stock market forecasts the economy, it is forecasting heavy weather.

Within the context of these mixed signals, it's no wonder investors remain skittish; committing fresh capital to the market feels risky, and it is quite reasonable to ask "what comes next?"…

Most signs point to the current sell-off being limited to a 10% correction.

But we are living in an unprecedented post-crisis world where markets have been distorted by five years of zero interest rates and successive bouts of quantitative easing. Accordingly, it is reasonable to ask whether traditional market signals will be as reliable as they have in the past.

A healthy stock market requires sustainable organic growth. U.S. stock markets have risen on the back of financial engineering, low interest rates, and other non-organic factors that are not only unsustainable, but disguise underlying weakness in capital spending and organic earnings growth.

The current sell-off, painful as it has been,  was long overdue; the real question is whether it will morph into a sustained bear market that recognizes the economy is overleveraged and central bankers have not solved the problems that led to the financial crisis in the first place.

Right now I believe the S&P still has a significant amount of ground to give up, with a support level as low as 1,775 on the horizon. Meanwhile, yields for the 10-Year Note may touch 1.75%, a full 25 basis points lower than current conditions.

Of course, all bets are off the table as the Ebola crisis escalates, or any of the other geopolitical hotspots take a turn for the worse.

Source : http://moneymorning.com/2014/10/20/this-bear-market-indicator-is-off-the-mark/

Money Morning/The Money Map Report

©2014 Monument Street Publishing. All Rights Reserved. Protected by copyright laws of the United States and international treaties. Any reproduction, copying, or redistribution (electronic or otherwise, including on the world wide web), of content from this website, in whole or in part, is strictly prohibited without the express written permission of Monument Street Publishing. 105 West Monument Street, Baltimore MD 21201, Email: customerservice@moneymorning.com

Disclaimer: Nothing published by Money Morning should be considered personalized investment advice. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized investent advice. We expressly forbid our writers from having a financial interest in any security recommended to our readers. All of our employees and agents must wait 24 hours after on-line publication, or after the mailing of printed-only publication prior to following an initial recommendation. Any investments recommended by Money Morning should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company.

Money Morning Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules