Observant stock market investors are taking note of a
development in the bond market, and its implications could be cause for
concern. In a warning sign for the stock
market, the spread between 2-year and 10-year bond yields is down to just 43
basis points, its lowest level since 2007.
A flat or inverted yield curve, in which yields on bonds with a shorter
duration are equal to or higher than yields on bonds with a higher duration,
generally means that investors are losing confidence in the strength of the
economy. When there is little difference
in the yields of short- and long-duration bonds, pressures mount on the
financial sector where the business mantra “Borrow Short and Lend Long” spells
trouble when there is little, no, or even negative difference between “Short”
and “Long”. The Treasury yield curve
inverted before the recessions of 2000, 1991, and 1981. In addition, the yield curve also presaged
the 2008 financial crisis by two years.
Womack Weekly Commentary September 18, 2017 The Markets “In theory, there is no difference between theory and practice, in practice there is.” Yogi Berra was talking about baseball, but the concept also applies to diversification, according to the GMO White Paper, The S&P 500: Just Say No . From the title, you might think the authors – Matt Kadnar and James Montier – don’t like U.S. stocks. They do: “Being a U.S. equity investor over the past several years has felt glorious. The S&P 500 has trounced the competition provided by other major developed and emerging equity markets. Over the last 7 years, the S&P is up 173 percent (15 percent annualized in nominal terms) versus MSCI EAFE (in USD terms), which is up 71 percent (8 percent annualized), and poor MSCI Emerging, which is up only 30 percent (4 percent annualized). Every dollar invested in the S&P has compounded into $2.72 versus MSCI EAFE’s $1.70 and MSCI Emerging’s $1.30.” The au...
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