The big event of last week was the inverted yield curve in the US (it happened with Canada too). I have stated here years ago that we should look for the end of the bull market when we see 2 things: Greed and tight money i.e. inverted yield curve which has preceded the past 7 recessions. So let's examine this. Is there greed out there generally speaking? The answer is no. People are fretting about slowing global growth and despite the market having been on a tear all year and now only 5% from all time highs, there's essentially no net inflows to equities from the public. Sorry but that's not greed, that's worry. Now, we did see flashes of greed late 2017 to January 2018 via the bitcoin frenzy and the herd embracing the idea of global synchronized growth but by end of the 2018 any sort of optimism was extinguished and since then it's been back to the wall of worry type behavior that has characterized most of the bull run since 2009. We've gone from the notion of global synchronized growth to a global slowdown whereby everyone seems to be waiting for the next shoe to drop. Could the inverted yield curve be this shoe?
There is no denying the bearish implications of the yield curve and I'm not taking it lightly, but the fact that everyone and their grandmother is fretting about it makes me think that either a) it will be a false signal or b) it will still be a while before the market tops out for good. When the yield curve inverted in 2006 there was hardly anyone mentioning it and it still took 12 months before the market peaked. In 1998 the yield curve inverted very briefly just before the fed aggressively slashed rates to avert the LTCM induced market meltdown. That gave what appeared to be a dying bull market an adrenaline shot for 18 months. History does show that even when the inverted yield curve is correct in predicting a recession, the market didn't top until 3-12 months later and so by means is an inverted yield curve a good short term indicator. With algos now dominating the landscape and everyone still on edge, it's no surprise that there was knee jerk reaction to the inversion which I believe is the reason for Friday's sell's off. The slide will probably continue for a bit longer if I had to guess, but ultimately I believe the market will hit and probably exceed all time highs before the end of year.
