(New York)

We might have just reached an inflection point in the market-economy mechanism. For the first time since 2008, short-term Treasury yields have just reached the same level as equity dividend yields. It is not even the two-year Treasury we are talking about, but rather the three-month, whose yield is now about 1.9%, the same as equities’. The convergence of a number of different yield rates is a strong warning sign of a pending recession. JP Morgan comments that “What has been surprising this year has been the degree to which cross-asset performance has behaved as if the late cycle had already arrived, despite little material change in the growth outlook”.

FINSUM: This is an important indicator. Both bond and stock investors are moving ahead of the economy itself, but their actions seem likely to create the reality they fear.

(New York)

The bond market saw ten-year yields move higher yesterday, up over 3% in fact. Despite the rise, stock markets eked out a small gain. Some would consider this a positive sign. However, Barron’s is arguing the opposite, contending that the lack of market breadth lately may indicate that a recession is on the way.

FINSUM: We favor market breadth as a good indicator of sentiment. When investors think things are good, all sectors tend to rise, when they feel bearish, those gains tend to be isolated. Notice how the Nasdaq has risen considerably this year while other markets are flat. This is a good indication of how investors are feeling.

(New York)

There is a lot of consternation in the market about the direction of equities. Some fear for returns as higher rates and the possibility of a recession become clearer. However, the world’s largest asset manager has just come forth with position that sticks with US equities. The best way to summarize BlackRock’s view is that it thinks “fears of peaking earnings are overdone”. The manager believes that worries over macro concerns have overshadowed very strong fundamental performance.

FINSUM: So the question is how much of the great earning performance was simply because of the tax cut, and how much came from an improvement in the underlying businesses. That is key to understand before predicting where the market is headed.

(New York)

Despite the hopes of investors, yields moved higher yesterday, with ten-year Treasury yields now back above 3%. For a while the momentum higher had been stemmed, but yesterday saw yields move sharply upwards. The move got the Dollar back on track, but it left equities nervous about what may lay ahead. Some market watchers say the recent market moves are a preamble to a correction.

FINSUM: Markets (stock and bonds) are bouncing all around, essentially momentum-less. We think things are going to be this way until a strong narrative takes hold—either trade war and recession, or something that renews the bull market.

(New York)

Bank stocks have had somewhat of a rough time this year. Like the rest the of the market they have been subject to turbulence. However, Barron’s says that clear sailing might lay ahead, as the stocks are looking less risky and likely to have more gains. The reason why is that bank stocks have been showing less and less beta lately, meaning they are trading at less relative volatility to the market than previously. This will lower their cost of capital and keep things steadier as rates rise, which will be bullish for performance. According to one research analyst, “Higher rates will have a positive impact on earnings, loan growth appears to be picking up, and we expect further regulatory relief”.

FINSUM: Given that higher rates improve net interest margins for banks, and the fact that there is significant regulatory relief occurring, we are feeling optimistic.