Investors are bracing for financial Armageddon
Don’t let the bulls lead you astray with their excess positivity — many even-keeled investors have started to price in some form of financial Armageddon within the next few months.
Whether they are right or wrong for doing so is irrelevant at the moment, it’s happening. And as a result, the dyed-in-the-wool bulls will probably sooner rather than later lighten the load on their overly crowded long trades (we see you Microsoft (MSFT) and Amazon (AMZN) perma bulls).
As evidence of this growing cautiousness on risk assets — thanks to escalating trade war concerns, the growing unrest in Hong Kong, dismantling of the Argentinean markets, Trump’s always lively Twitter feed —look no further than the insane move in Treasuries in recent weeks.
The yield curve — measured by the difference between the U.S. 10-year note and two-year note — is at its flattest level since 2007. Historically when this extreme flight to safety occurs, a U.S. recession has soon followed. The 10-year yield of 1.68% as of Tuesday afternoon is nearing in on the all-time low of 1.318%, reached three years ago.
“Investors are pricing in concerns about global growth into yields,” TD Securities strategist Gennadiy Goldberg told Yahoo Finance. Goldberg is hesitant to say a financial Armageddon — akin to a mini selling panic in a host of risk assets — is coming primarily because global central banks remain very accommodative.
Others agree that a panic isn’t brewing.
Is there a reason to be concerned?
“We aren’t alarmed by the move in the 10-year — I think we expected it,” Cales Silsby, Whittier Trust chief portfolio management, said on Yahoo Finance’s The First Trade. Silsby doesn’t believe a financial Armageddon lurks.
“We saw this in 2015 and 2016, the 10-year yield went to 1.6%. And now whenever you see the 10-year reach low levels like that people have to get used to it. We think it’s really pricing in extremely low rates, it’s not pricing in a crisis in the U.S.”
But that doesn’t explain some other fun facts emanating from these more volatile markets. For starters, only five out of 11 S&P 500 sectors have reached new highs this year, according to Morgan Stanley data — but three of them are defensive in nature (utilities, consumer staples, and REITS).
Morgan Stanley strategist Mike Wilson said that performance suggests the defensive undercurrent in markets currently. Wilson believes we are in a cyclical bear market, and that S&P 500 earnings estimates remain too high.
Not enough fear-mongering for you?
Pull up the stock charts on Yahoo Finance for bank stocks such as Bank of America (BAC) and Goldman Sachs (GS) this past month —each name has been slammed due to the collapse in yields (low rates means banks earn less money) and rising recession risks. To that latter point, the chance of a U.S. recession has reached its highest level since 2008, according to a key indicator out of the New York Federal Reserve. Meanwhile, a new survey from Bank of America Merrill Lynch puts recession probabilities at the highest dating back to 2011.
On that note, happy trading.
Brian Sozzi is an editor-at-large and co-host of The First Trade at Yahoo Finance. Follow him on Twitter @BrianSozzi
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