03 Dec Another Sign of a Recession
Markets experienced their first yield curve inversion in over a decade today, with the spread between the 3 and 5 year notes falling negative. Although the more closely watched spread between the 2 and 10 year yields are still about 20 basis points away. This move is the first sign of what I believe will be an overall yield curve inversion. Historically, an invested yield curve is one of the most accurate precursors to a recession. This will likely cause the Fed to reconsider their intent of continuing to hike short term interest rates, as Fed President Jerome Powell mentioned last week. This is a sharp turn from his statements made just a few short weeks ago where he indicated that continued rate hikes are justified. This falls in line with my longer term prediction that mortgage interest rates will fall in the months to come. Given that few economists currently are aligned with this belief, this statement should be taken with a grain of salt. While most believe that both mortgage interest rates and home values will continue to climb higher, I strongly believe that one or both will soften.
A cease fire was announced in the trade war between the U.S. and China, which has fueled stock prices higher. This has also fueled hope for a year-end stock rally that could put stocks back on a path of earning a reasonable return for the year. However, a look at the charts will show that the recovery is now near a 50% correction of losses, which is typical in most any significant period of loss. Meaning that unless stocks are able to make a decisive break above current levels, this could be a short term recovery as stock prices make their way down the charts. The next few days will be extremely important for stock investors. If prices do break higher, they would have an easy path to reach new all-time highs Regardless, the volatility is not a good sign for stock investors. Personally, I’m skeptical of this move higher and see the volatility as a sign of nearing a bear market.
With bond prices moving higher, there is no need to immediately rush to lock. However, be careful of the 100 day moving average. This could prove to be a strong ceiling of resistance that could cause bond prices to fall.