Yield Curve Comes Close To Inverting

Yield Curve - Friday Ends Strong Week

This was an amazing week for stocks. The S&P 500 increased 4.85%. That’s greater than the entire year to date increase which is 3.24%.

Stocks rallied 0.82% on Friday because of hopes that America and China will make a trade deal. It’s dangerous for stocks to rally on trade war speculation. It increases the amount they will fall if there isn’t a deal. And it decreases the amount they will rally if there is a deal.

Personally, I think if there is a deal in the next few weeks, stocks will rally and then fall again. A deal would be great, but it doesn’t change the direction of economic growth.

Not having a negative catalyst doesn’t equal a positive. Even though stocks had an amazing week, the CNN Fear and Greed index ended the week at 22 which is extreme fear. I was wrong to doubt the index this week.

However, stocks had 2 catalysts which helped them: the Fed and trade negotiations. I don’t think Powell was dovish, but stocks did. We will see who was right at the next meeting on December 19th.

The best 2 sectors on Friday were utilities and healthcare as they increased 1.54% and 1.08%. It’s weird to see utilities leading the market on a positive day.

They were probably up because the long bond rallied. I will discuss that in the next section of this article. The only down sector was energy as it fell 0.24%. Oil fell 22% in November, making it its weakest month in over 10 years.

Yield Curve Flattens

The stock market rallied, which would make you think investors are optimistic on economic growth. Yet the long bond also rallied which signals growth is slowing.

Finally, after being completely wrong for a few weeks, my bullishness on the long bond has been proven correct. The 10 year yield fell 4 basis points on Friday to 2.99%. That is a very sharp decline of 27 basis points from its peak early in November.

The decline in oil and weak economic reports justify this decline in yields. This decline in the long bond yield once again proves the argument that high deficits don’t cause yields to increase.

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