Weekly Stock Market Recap – Jun 16, 2019

Modest gains this past week after the massive reversal in markets upward the week prior.  This coming week will all be about the Federal Reserve and the word “patience”.  That simple word alone drove the market up well over 20% since the December lows.  After a selloff, the Fed came to the rescue again a fortnight ago and now expectations are for a rate cut soon – most believe in July.  So the removal of the word “patience” from the Federal Reserve statement this coming week will confirm rate cuts coming very soon to a theater near you!

“The market is willing to bet heavily on the Powell put,” Yousef Abbasi, global markets strategist at INTL FCStone, told MarketWatch.   “We’re in a far more uncertain place, but if anything, the market has really shown its ability and wherewithal to place a bet on the strength of the Fed put.”

The Chinese – U.S. trade deal has been put on the backburner after leading the markets for months as it’s all Powell saving the market!

Economic news was sparse but it is worth noting retail sales, which rose 0.5% in May, slightly below the 0.7% gain expected by economists. More important was the revision of April sales, which the Commerce Department now says rose 0.3%, versus the previously estimated 0.2% decline.

With all the giddiness about the Federal Reserve riding to the rescue of the markets as it has seemingly done non stop since the Alan Greenspan era, BeSpoke has a nice chart showing the relationship between an inverted yield curve (3 month v 10 year) and recessions.

Although it first briefly inverted (3-month yield greater than 10-year yield) in late March, the latest period of inversion that began on May 23rd has now stretched into its 15th straight trading day.  Back when the yield curve first inverted, we made the point that a brief inversion of the curve would likely be an immaterial issue for the economy.  However, the longer the inversion lasted, the bigger the potential problem would become as the impact on lending would become more pronounced.

To illustrate this, the chart below shows consecutive daily periods where the yield curve was inverted with recessions overlaid in gray.  Looking at the chart, just about every recession was preceded by an extended period where the yield curve was inverted.  Of the seven prior recessions since 1962, only one was preceded by a period where the curve was not inverted for at least 50 or more trading days.  That one period was leading up to the 1990 recession when the curve was inverted for 30 trading days or twice the length of time as it has been inverted for now.  Conversely, there has also only been one period since 1962 where the curve was inverted for more than 50 straight trading days and a recession didn’t follow (1967).