Do you notice the Yield Curve narrowing?
As I’ve explained in my book, “Dow to Drop 80% Soon?” one of the best predictors of a recession is a negative yield curve. The yield curve is inverted when long term yields are lower than short term yields. The yield curve inverted just prior to every U.S. recession in the past 50 years.
As of June 15, 2017, the yields between the 10-year and 30-year treasuries have been narrowing, i.e. 10-year is now 2.16% and 30-year is now only 2.78%. See the government website below:
When the yield becomes negative or inverted, market sentiment suggests that the long-term outlook is poor and the yields offered by long-term fixed income will continue to fall. It also spells trouble for the financial sector as what started happening in late 2006. The incentive for depositors to leave their money with the bank for longer periods of time, say 5 to 10 years is to earn a higher interest rate. If the interest rate of return is the same or less for 5 years compared to 1 year, this incentive is gone. This means that profit margins fall for companies that borrow cash at short-term rates and lend at long-term rates, such as hedge funds, banks and mortgage companies. Equity lines of credit and adjustable rate mortgages (ARMs) which are periodically adjusted usually go up since they are based on short-term interest rates. Debtors who got stuck with these loans will need more money to pay for additional interest. They will need to tighten their belts since they will have less money to spend on consumer goods that is why recessions follow an inverted yield curve.
Although we are at record high territories in the stock market, with the Dow trying to breach the new resistance level of 21,700, we live in dangerous times. I see the Dow can quickly lose 3,000 in just a period of 10 to 20 days. The reason for this stock market high is the pro-business stance of this administration even though not very much has come to fruition yet, i.e. the talk about curtailing burdensome regulations, lowering corporate, capital gains and repatriation taxes and increasing the defense and infrastructure budgets. Investors are optimistic that Trump’s government technocrats will continue to develop policies that will increase our GDP which should keep recession farther away in the horizon.
Correction before Dow 20,000?
Just like I said in my previous post, we may experience a 5-10% correction before breaking through the resistance level of Dow 20,000. It has been 2 weeks now that the Dow has been hovering around the resistance level of Dow 20,000 but has not closed above that. We may be in dangerous waters although in the long run I still feel bullish about stocks. Read my book “Living Rich and Loving It”, to find out when you should really get out of stocks and put your money into a money market fund. Merry Christmas, happy holidays and a prosperous New Year!!!
November 22, 2016
As of today’s closing, all the U.S. stock market major indices reached record highs. The Dow closed above the resistance level of 19,000. In the short run, the stock market will not have a “stairway to heaven” type of climb. I guarantee there will be dips at the slightest whiff of any bad news. Remember the first quarter of this year when the price of crude dipped below $35 per barrel? Moreover, there will be profit taking by the Gnomes of Wall Street.
The new resistance level we are looking for on the Dow is 19,500. There may be a 10% correction before reaching this resistance level. The climate has suddenly changed with the election of Trump. The Gnomes of Wall Street, or perhaps we should call them the shepherds leading the flock suddenly decided that a Trump presidency is good for the economy. Does anyone even remember that the Dow futures were 800 points down on election night as Trump started winning the battleground states one by one? What was that all about? Even though the market opened higher on the day after Election Day, my friend Jake got out of the market as soon as it opened at 9:30, Wednesday morning and put his entire portfolio into a money market fund. He voted for Hillary and was afraid that Trump’s victory would precipitate a global equity sell-off because he believed that Trump is an unpredictable, unstable and unqualified leader who’s the laughing stock of the whole world. Even after the Dow gained 1,000 points, my friend Jake is still out of the stock market. He told me last night he “cannot believe why the market keeps going up”. Don’t mix investing with politics, folks. Happy thanksgiving!!
It has only been over a week since the voters elected Trump and housing starts are up, unemployment claims have been the lowest since the great recession, retail sales look strong, corporate profits are up, the Dow gained more than 5% since the election. Happy days are here again? We’ll see. The uncertainty of the US elections kept the stock market stagnant for almost a year. So this is a post-election bump that still has legs. Trump’s pro-business policies of curtailing government regulations, lowering corporate, capital gains and foreign earnings taxes are meeting with great enthusiasm from the gnomes of Wall Street. Look for a correction around Dow 19,500. The correction could be 5-10%. Follow this blog so we may discuss the possibilities.