Special Bulletin: July 12, 2022

Does Inverted Yield Curve = Recession?

It has been almost 3 weeks since we wrote on June 22nd that a bounce attempt had arrived. At that time, the stock market’s internals flashed the extreme readings that history has shown are usually visible when selling prepares to take a break. Indeed, the major stock indexes have not yet closed under the lows of that day and have gently risen since.

When looking closely at the internals of “the bounce,” which is what market technicians do, what we find is not very inspiring. One might define the rally as “tepid.” While it is true that by the Investor’s Business Daily definition the stock market experienced a follow-through day (a rally confirmation) on June 24th and is in an uptrend, the current bounce is weak by historical measures and is lacking real leadership so far. Hence, our yellow light… and theirs.

This week, and the rest of July for that matter, may prove very telling. The CPI data for June will be released Wednesday morning, and the Fed’s Beige Book that afternoon. The PPI comes Thursday morning and the Q2 earnings season starts in earnest with many big financials announcing results by Friday.

Our Current Market Outlook remains “Uptrend Under Pressure” with a yellow light. Our “Core Four” (see top of page) has improved slightly and has 1 green, 2 yellow and 1 red light- a solid yellow condition. One on the components, and arguably the most important of the 4- the moving averages- is red but close to going yellow. While this would reflect a slight improvement in the overall internal, technical condition of stocks, it would not change the C.M.O. score to green by itself. But it would be seen as a step in the right direction by the bulls.

A comment we made in our blog on June 15th bears repeating, “Keep in mind though, the longer-term major trend is still very much down. It is very possible that a third nasty wave of selling could hit the market by the fall of this year. That risk is still present. However, a surprise dovish announcement by the Fed, or Putin being replaced, or something else like that could spark a meaningful short-covering rally at any moment.

Many investors are wondering: Does “inverted yield curve” = Recession? In many cases throughout history it has. For investors though, it seems irrelevant at this point as the stock market has already experienced its own “recession.” We believe the Fed has its sights set on the froth in the real estate market now and that another hike or two should satisfy them and achieve their short-term goal. If, however, inflation will not relent (nor the Fed towards it) then a soft-landing would likely fail and lead to a panic crash.

On an economically positive note, while it may be a bit early to be thinking about the vibrant colors of autumn, unbiased experts are forecasting that this November will have a great deal of red, particularly early in the month, and it is shaping up to be a majestic and historic catalyst for ’23 & ’24. Red wave tsunami warning issued.

Game plan: Continue trusting the Lord to meet your needs and to provide wisdom as you seek His will. Update your watch lists. Stay on your toes and keep looking forward… and up!

Have a Triumphant day! ®