1. Slow GDP growth of about 1.5% during the first quarter of 2008
2. Moderate GDP growth of about 2.5% one year from now
3. Continued stress in the financial markets for the next few months while investors avoid institutions suspected of holding of low-quality loans
4. Happy new year...there may be a light at the end of the tunnel in the form of narrower commercial paper quality spreads
Fear appears to be on the wane (again):
4 comments:
With the 3 month yield increasing and the 10 year yield decreasing; would this inversion, if it were to happen, imply a recession or more importantly a bear stock market? If the answer is yes it would, is there any way to tell how bearish or how long the market could go down?
Thanks for getting back to me on my question. Your book was a real find for me since I had not read such an interesting analysis of bonds before. One chapter in your book talks about the inversion of the 20 and 30 year yields as an early warning to recession / stock market decline. We seem to have this inversion on this part of the curve now, is it significant?
Dear Anonymous,
Yes, an inverted curve implies a sell-off in the stock market.
However, a real recession and prolonged bear market needs a yield curve inversion from the 10-year to the 30-year as well. This condition suggests that investors think rates are too high and poised to decline during a prolonged economic slowdown. We do not have that yet which is why I am more optimistic than most people and do not see a consumer-led global recession. It is also why I suggested that aggressive investors buy equities last August at one of the lowest points in last year's market.
To answer your last question...the S&P 500 usually declines as least 20% during a major decline. This lasts until the yield curve, including the money market, normalizes.
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