Market sold off after the 2 year and 10 year yields inverted for 2 hours, earlier in the day. An inversion of the yield curve has been a fairly reliable predictor of recession in the past, and between that and the continued global turmoil in Hong Kong, Argentina, the slowing economies in China and Europe, investors are getting very cautious. A week after a 2019 record sell off, the Dow created a new record and lost 800 points to close at 25,479.
With global economic and political turmoil already giving pause to stocks, now the yield curve inversion has added to the pucker factor for investors. Providing some perspective on the yield curve inversion, it has been a predictive factor of recessions in the past because it generally indicates that growth and inflation are slowing, and corporate borrowing is getting expensive. However, the yield curve stayed inverted for more than 2 hours and those recessions generally occurred 12-18 months after the yield curve inverted and saw stock market gains during that time period. Also, when you look at the factors within the yield curve inversion, it’s hard to imagine 1.5% (or some correlating factor of that) being a crippling interest rate for a corporation to pay. Also, yields go down as more people buy bonds. People buy bonds when they are cautious. Just like there can be irrational stock buying, where investors buy when stock prices don’t warrant their valuation, there can also be irrational bond buying due to being overcautious. The 10 year treasury is meant to be somewhat correlated with inflation, and currently, inflation was at 2.2% and trending to 2.8%, whereas bond yields are trending the opposite direction. This means that if inflation continues to stay on trend, or even maintains its level, bond investors will be losing purchasing power, which doesn’t seem like a great deal.
All of this should continue to put pressure on the Fed to lower short term interest rates, and today, President Trump took another whack at the Fed for raising rates too much and being late to lower them now. Interestingly, yesterday’s blip mentioned Brian Wesbury’s thoughts that interest rates weren’t the problem it was policy, and today, Allianz’s Chief Economic Advisor, Mohamed El-Erian, had the same thoughts when he said that the Fed doesn’t really have enough influence to control the economy with all the political turmoil.
On a good note, the scouts have invaded, I mean landed, in Kandersteg and are already having a good time meeting other scouts. Check out the Faceplant page for the latest photos!