Over the past two years, numerous exogenous events have been cited as potential threats to the bull market. Brexit, the election of Trump, all of Trump’s political “crises”, North Korea, a trade war with China – all caused epidemic reactions in the stock market, but the bull has carried on higher. It has become clear that the bull market will end not end due to geopolitical events. Nor will valuations stop the rally. Analysts can continue revising earnings estimates higher to make valuations look palatable (however expensive valuations will later be the fuel to drive selling in the bear market once upward earnings revisions cease). Rather, it is most likely that internal, market-based factors will be the ultimate trigger to trip up the aging bull market. And, as the title to this week’s Commentary indicates, we believe that yields will inflict the coup de grâce ending the equity bull.
Lots of traditional indicators have become irrelevant in this central bank liquidity-driven market. The Yield Curve, however, will be difficult for gluttonous bulls and trading algo programs to ignore. An inverted Treasurys yield curve has always been an ominous sign for growth and a reliable harbinger for recessions. And with the latest bout of flattening, the reality of sub-zero spreads may soon collide with an otherwise sanguine outlook on the economy.
The yield curve from 5 to 30 years has flattened to about 30 basis points, the narrowest spread since 2007. From 2 to 10 years, shown in our chart below, the gap of 47 basis points is also the smallest in more than a decade. For extending to 10 years from 7 years, investors pick up a mere 3.5 basis points, less than a quarter of what they got a year ago.
Full Commentary available on the WMA website