Bear market won’t come until the yield curve says so: Kleintop
May 13, 2014, 1:23 PM ET
Jittery investors who are looking to the indexes for signs of an approaching bear market might do better by focusing their attention elsewhere: on the yield curve. So says Jeffrey Kleintop, chief market strategist at LPL Financial, who asserts in a note Tuesday that the yield curve has a perfect track record of predicting the top of the stock market over the past 50 years, and it’s not signaling a bear market right now.
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The yield curve is another way of describing the difference between short-term Treasury yields and long-term yields. It’s a favorite tool among financial and economics wonks because of what it says about the economy. The widening between the yields of different maturities, known as a steepening curve, often signals a brightening economic outlook. On the contrary, if the curve flattens considerably, the growth outlook tends to be souring.
If the Federal Reserve aggressively hikes its key policy rate, short-term Treasury yields in turn rise swiftly. If short-term yields climb higher than long-term rates, the curve is said to invert. An inverted yield curve is generally a sign that a recession is about to begin, which means that it’s also a predictor of the top of a bull market in equities, says Kleintop.
There are a number of different Treasury maturities one can use to calculate the yield curve, but Kleintop chooses to find the spread between the 3-month T-bill 3_MONTH and the 10-year note 10_YEAR -2.41%. Here’s where that differential has turned negative over the past 50 years, and how it compares with the S&P 500 index SPX -0.14%:
Writes Kleintop:
“Every recession over the past 50 years was preceded by the Fed hiking rates enough to invert the yield curve. That is seven out of seven times — a perfect forecasting track record. The yield curve inversion usually takes place about 12 months before the start of the recession, but the lead time ranges from about five to 16 months. The peak in the stock market comes around the time of the yield curve inversion, ahead of the recession and accompanying downturn in corporate profits.
This puts Kleintop in the same camp as Jonathan Golub, chief U.S. market strategist at RBC Capital Markets, who also claims the the bull market has more room to run because a recession isn’t imminent.
So now you’re worried about when the curve will invert. The yield curve hascertainly been flattening over the last half year as bond investors fret about when the Fed will begin hiking its lending rate, which has been pegged near zero for the past half decade. But the good news is that the curve is still steep — and certainly a long ways from inverting. Here’s what the curve looked like on Monday:
As Kleintop writes:
“Even if long-term rates stay at the very low yield of 2.6%, to invert the yield curve by 0.5% the Fed would need to hike rates from around zero to over 3%! Based on the latest survey of current Fed members that vote on rate hikes, conducted earlier this year, members do not expect to raise rates above 3% until sometime in 2017, at the earliest. The facts suggest the best indicator for the start of a bear market may still be a long way from signaling a cause for concern.”
The yield curve, that is the 10 30 US Sovereign Debt Yield Curve, $TNX:$TYX, steepened at the end of the week of May 30, 2014, suggesting that a stock market reversal is at hand.
ReplyDeleteEver since Milton Friedman came out with the Free To Choose doctrine of floating currencies, the world has been operating on a debt based money system, and to the dismay of Austrian Economist, not a hard asset money system.
At the end of the age of liberalism, meaning freedom from the state, debt becomes money, as the fiat, that is the rule of the Banker Regime is coming to a climax. And as is seen in May 28, 2014 financial marketplace trading, with 30 Year US Government Debt, EDV, and US Ten Year Notes, TLT, rising strongly in value, debt has become wealth.
The Distressed Investments, traded by the Fidelity Mutual Fund, FAGIX, have increased in value ever since the US Fed traded out “money good” US Treasuries for the worst of debt in QE1 in 2008, with the aim of restarting financial marketplace investing and regenerating the global economic system.
The US Fed’s monetary policies and the Banker Regime’s policies of credit choice were stunningly successful, in that they have produced terrific Equity Investment, VT, and Credit Investment, AGG. On May 28, 2014, the world is attaining peak wealth, it is an awesome moral hazard based wealth.
As the 10 30 US Sovereign Debt Yield Curve, $TNX:$TYX, has flattened, seen in the Flattner, ETF, FLAT, trading higher in value, Distressed Investments, FAGIX, and Junk Bonds, JNK, have come to be established as the most valued of all investments.
Soon physical possession of gold bullion will emerge as the only “safe asset”, as the fiat of the Banker Regime fails, as investors derisk out of currency carry trade investments and debt trade investments.
The new fiat of diktat coming from the Beast Regime’s regional fascist leaders, will emerge to establish regional security, stability and sustainability, and enforce debt servitude in each of the world’s ten regions, and throughout all of mankind’s seven institutions, this being foretold in Bible Prophecy of Revelation 13:1-4.
This monster is completely different than the Creature from Jekyll Island; as is has feet of a bear, mouth of lion, and the stealth of a leopard, and is foretold to arise out Mediterrean, that is Club Med, waves of sovereign insolvency, banking insolvency and corporate insolvency.
Reuters reports ECB Goes On 300 Million Euro Spending Spree For Bank Watchdog. ECB will spend 300 million euros this year and next in building an elite group to monitor top banks, with the lion's share spent on generous pay for many of its staff.
In summary of financial market place trading, on Wednesday May 28, 2014, the US 30 Year Government Bonds, EDV, and US Ten Year Notes, TLT, traded higher, as the Benchmark Interest Rate, ^TNX, closed at 2.44% in a process of coming to establish peak credit wealth, AGG.
If one is invested in a bond fund, then one is jubilant, as these have soared terrifically higher since the first of 2014. For example, the PIMCO Long-Term US Government C, PFGCX, has returned 8.9% this year, and at the same time yields 1.8%.
The world is a historic inflection point. The death of currencies is underway, on the failure of trust in the monetary policies of the world central banks to stimulate equity investment growth and global economic growth, with the result that the US Dollar, $USD, UUP, is trading somewhat higher.
The trade higher in US Dollar, $USD, UUP, coming largely from a purchase of the 30 Year US Government Bonds, EDV, and 10 Year US Notes, TLT, caused Gold, GLD, which is both a currency and a commodity, to trade strongly lower, falling out of a consolidation chart pattern. Its lower price presents a buying opportunity, as it is in a bull market, and will be in demand as fiat money and fiat wealth is now in a dying process. One should begin dollar cost averaging a purchase of gold bullion.