Inverted Yield Curve as Recession Predictor

Whether or not the yield curve on U.S. Treasuries is inverted can be a useful tool in forecasting the next recession, according to a recent Barron’s article. The inverted yield curve has predicted three of the past three recessions, the article says, which “helps lend confidence to its predictive powers.” Typically, long-term interest rates are higher than short-term rates, which results in an upward-sloping yield curve. But an inverted curve occurs when short-term rates are… Read More

The Stock Market Still Seems to Believe the Fed

Economic indicators show that a slowdown might be in the offing, even though the Fed has been raising rates and the labor market continues to tighten, according to a New York Times article from earlier this month. Despite the occasional surge in technology stocks and the steady drop in energy shares, the article says the market continued to push forward through the second quarter. But some investment advisers are developing concern that if the economic… Read More

Dalio Says Global Economy Entering New Phase

Billionaire hedge fund investor Ray Dalio says the global economy is entering a new phase where “markets won’t get the same level of support from monetary policy makers,” according to a Bloomberg article from earlier this month. The chairman of Bridgewater Associates recently wrote that central bankers are shifting from the nine-year period of holding down interest rates and are giving clear signals that stimulus will be tapered. He notes the following: The Fed is… Read More

Bond Yields Will Probably Stay Low

The bond market continues to cause confusion for experts, writes a Charles Schwab strategist in a recent Barron’s article. Since the end of the recession in 2009, it argues, “consensus expectations have called for higher bond yields and the death of the 35-year bond bull market. Yet, 10-year Treasury yields are now nearly 200 basis points lower than in 2010.” The author opines that, although economic conditions support bond yields above 2%, market expectations are… Read More

Paul Tudor Jones Issues Warning for Fed

The billionaire investor says that “years of low interest rates have bloated stock valuations to a level not seen since 2000,” and the fact that the current market cap-to-GDP ratio is the highest it’s been since 2000 should be “terrifying” to a central banker. This according to a recent Bloomberg article. Jones’ warning echoes that of many other money managers, the article says, who are concerned that stocks are trading at dangerously high levels. The… Read More

Twitter and the Fed

Research shows that trading strategies built around tweets in the days preceding Fed meetings have been profitable, writes Steve Russolillo in this week’s The Wall Street Journal. As the use of quantitative investment strategies continues to rise, social-media platforms such as Twitter have become popular sources of intel to gauge investor sentiment, says Russolillo, referring to the frequency and impact of the president elect’s tweets since the election. A study conducted by Andrew Lo, a… Read More

“Irrational Exuberance” Revisited

This past Monday marks the twenty-year anniversary of former Fed chairman Alan Greenspan’s famous speech in which he used the phrase in reference to then-stretched equity valuations. In last week’s Wall Street Journal, Steven Russolillo writes, “His call was spectacularly wrong—at first.” Russolillo offers a Greenspan quote from a WSJ interview: “If you rate me on my irrational exuberance forecast, I get a C. But analytically, it was describing a process that I thought we… Read More

“Presidential Cycle” Stunted by the Fed says Grantham

The phenomenon of robust stock market gains during the third year of a president’s term—coined the “presidential cycle” by fund manager Jeremy Grantham—may have been “killed off” by the Fed, according to an article in the Financial Times. Research conducted by Grantham, founder of the GMO fund management group in Boston, analyzed stock gains during the first, second and fourth years of presidential terms going back to 1932 and found that average gains during those… Read More

Potential Downsides in Ultra-Easy Monetary Policy

The Fed’s implementation of monetary easing after the financial crisis, while intended to bolster a teetering economy, is instead leading us into a Pay-the-Piper scenario, says Brian Singer, head of the Dynamic Asset Allocations Strategies team at William Blair in a recent article for Barron’s. “We’ve now seen eight years of ultra-easy monetary policy, which we believe won’t end well,” he says. Singer recalls two other efforts that had precarious outcomes: The “oil shock monetization… Read More

Jason Zweig on Why Interest Rates Matter

When shopping for sale items, it’s customary to look at the price tag and see how much an item has been “marked-down”. You’d rather browse the “30% off” rack than the racks with lower discounts. Why? Because it affects the item’s value. On a much more sophisticated level, stock values and interest rates have a similar relationship. In a recent Wall Street Journal article, Jason Zweig describes how interest rates are an important factor when… Read More