180 degreesJanuary 10, 2019 -
Categorized in: IAG News
Since the September 20th S&P 500 Index all-time record high the financial headlines have focused on the stock market’s choppy decline. However, there is another equally fascinating half of the story in the financial markets over the last three months.
The other half of the story is the bond markets where expectations have turned 180 degrees over the last three months.
In September bond traders expected the Federal Reserve to raise its target overnight interest rate in December 2018 and at least three times in 2019.
They were right about December when the Federal Reserve increased its overnight rate by .25%, but they have completely reversed course on their expectations for 2019.
As of this writing, bond traders have priced in only a 20% chance of a rate hike for the entire year according to CME Group. Even more interesting is that bond traders now believe that there is a slightly greater probability that one year from now the Federal Reserve’s target interest rate will be lower than today instead of higher.
That is a 180 degree bond market turn indicating that bond traders are expecting at least an economic slowdown and perhaps even the start of a recession in the next 12 months.
At some unknown point in the future the United States will undoubtedly experience a recession again, but based on current economic indicators we think the odds of a recession starting in the next six to twelve months is fairly low.
Financial markets are the collective opinion of millions of people around the world and our opinion is only one small voice in this crowd. As we see it, the financial markets are a bit too pessimistic right now. We think both interest rates and stock markets have the potential to do another 180 degree turn and reverse some of their recent decline in the coming months.
Quote of the Week:
Peter Lynch: “Far more money has been lost by investors preparing for corrections or trying to anticipate corrections than has been lost in the corrections themselves.”
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