Navigating the Market’s Volatile Behavior
Does January’s market swings have you sweating yet? The kick-off to 2019 is certainly one for the record books. But the lingering concern over what’s next is where most investors are focusing.
Indicators that Come First
In the last decades, one signal typically flashes ahead as an indicator of every market peak. In fact, this indicator has a near perfect track record. While it isn’t necessarily a predictor of a recession, the indicator economists are closely watching the interest rate spread between 10-year and two-year Treasury bonds.
Breathe easy for now…it hasn’t shown up just yet.
Here’s why it is connected as a signal to the market. Long-term and short-term interest rates move for different reasons. Longer term 10-year yields move based on the market period, but short-term two-year yields move largely because of the Federal Reserve. (In a healthy market, the long-term rate should be higher than short-term rates.) Investors demand higher payments when they lock their money away in Treasury bonds and the Fed has been hiking rates in recent years. Short-term rates have risen. Long-term rates have as well, but not as fast, which gives economists an important signal.
Economists are watching the yield curve. The yield curve is a chart showing the interest rate paid on bonds of different maturities. History suggests that when the yield curve inverts and two-year yields move higher than 10-year yields, a recession is ahead. Again, this indicator historically has a near-perfect track record for the last 40 years. Consider this, stock market peaks happened in 1980, 1989, 2000 and 2007. They happen every time the yield curve inverted, and the line dropped below zero.
In recent months, this indicator has been inching closer to zero but it’s not there yet.
Yield Curve as a Forecasting Tool
Based on the yield curve, it appears that the current correction isn’t the next recession. Add to that, the facts that when the yield curve does drop below zero, stocks generally have another 12 to 18 months of good times. Economists suggest that while stocks are correcting, the state of the market as a whole is not giving them any reason to expect the worst.
Bradford Does the Research First
We’re a team of hungry learners at Bradford Financial Center. We design custom strategies and devote countless hours to research in order to make sure our clients are prepared for whatever the market has in store.