It would not surprise me to see the market give back 10–15% over the coming weeks and months. Valuations are very full and the economic data is weakening. But something to watch is the bull-steepening of the 10-yr / 3-mth yield curve from inversions. Whilst not a great timing too – generally its ‘vector’ is correct. That’s a warning – despite the Fed cutting rates.
Credit
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Brand USA Downgraded
The stock market has risen at a dizzying speed the past six weeks – up over 20%. I would reduce risk at these levels. We’re now back at valuations similar to the beginning of the year – however the risks are now considerably higher. But let’s say the net result is a tariff rate in the realm of between 10% and 30% – that would be disastrous. My back-of-the-envelope math estimates a substantial $300B “economic burden” that both companies and consumers will be forced to bear.
The Key to Growth: Business Investment
With 10-year yields trading around 4.50% (with the possibility to go higher) – why haven’t equities sharply corrected? It’s a good question. For e.g., on the surface, one might think equities would struggle given the zero risk premium investors are receiving. But that has not been the case. The stock market has withstood the sharp rise in bond yields (for now anyway). However, I believe there is a simple explanation. It’s the amount of liquidity in the system. Liquidity is abundant – evidenced by the very low credit spreads in the market (participants see very little risk). Generally credit spreads widening are your first sign of trouble.