Are Bonds Signaling a Peak in Stock Market?
*Barron's, by Jeffrey Kleintop, June 14, 2017
”Why does an inverted yield curve signal a major peak for the stock market? Every recession in the United States—and accompanying global economic recession over the past 50 years—was preceded by an inverted yield curve.
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.
Examining yield curves from around the world, the prognosis on the likelihood of a global recession and bear market is favorable. Like a test showing a patient’s cholesterol is elevated but not yet in the danger zone, yield curves need to be monitored.
While the risk may be rising, the yield curves indicate that the risk of recession is currently modest—except for the United Kingdom—based on historical evidence, but history doesn’t guarantee future performance.
Last week’s loss by the Conservative party of its majority in the U.K. parliament is unlikely to make Brexit negotiations any easier. Yields may be reflecting the heightened challenges facing the U.K. In fact, the U.K. faces the highest probability of a recession in the coming year of any major country based on the slope of its yield curve and the history of U.K. recessions since 1970.”
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