A positive day with the Dow Jones up 35 points (+0.15%) and the Nasdaq up 57 points (+0.76%)
We had a substantial gap down at the open that came close to testing last week’s lows. A powerful rally followed that saw the closure of today’s gap lower and subsequent recovery. In short, the stock market continues to behave just as our mathematical and timing work has predicted. If you would like to find out what happens next, please Click Here
Let’s talk about the yield curve.
Yield Curve Will Invert From the Inside Out
While some of the more obscure yield curves are getting close to inverting, most people watch the 3m/10yr curve. At 1.02%, it is not yet at risk of inverting. If, however, the Fed continues to hike without inflation materializing, this could quickly change. The market has seen this movie before. So far, the script is playing out as expected.
As of July 1, the 5-10 spread is still 12 basis points (0.12 percentage points), sinking slowly from 15 basis points on June 5.
Here is the key takeaway: “Since 1989 there are no instances when the 5yr/10yr curve inverts in isolation.”
The script is playing out, but whether it remains “as expected” will depend on who expects what.
No Crystal Balls
Just because the market usually gives a recession warning of approximately a year, does not mean we will get that year.
I expect we won’t. There are simply too many things going on with tariffs, in Europe, and in China.
But don’t count on my crystal ball. It’s been broken for some time. Then again, no one has a crystal ball, at least one that is accurate.
Here is my take away on the whole yield curve situation. Take a look at the chart below.
Notice something of incredible importance. The actual inversion is never very deep and does not last very long. Historically speaking. As a result, the event itself is of limited importance.
What is?
The flattening of the yield curve going into the recession and/or stock market collapse. It takes much longer and it is devastating to earnings of most financial firms. The primary driver behind today’s so called debt fueled recovery. And today’s yield curve is already as flat as a poor’s man pancake.
In other words, most of the damage has already been done. It is little beside the point if the yield curve actually inverts (it will) or not.
Our mathematical and timing work associated with the stock market tends to agree. If you would like to find out what happens next, please Click Here.
