Has The Plunge Begun?

It was one of the key early warning events that took place ahead of previous major bull market peaks. And despite the continued resilience of stock prices and proclamations of new all-time highs on some of the benchmark indices as recently as Thursday, we have seen some notable splashes on this front in recent weeks. It is the flattening of the yield curve toward inversion. And it is worthwhile to consider the following: has the long-anticipated plunge in the yield curve finally begun?

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Let It Grow

While the stock market continues to levitate in a seemingly perpetual state of bliss, most other asset classes are grappling with the realities that are unfolding in the weeks ahead. Leading among these is the complete and total about-face the U.S. Federal Reserve has pulled over the past week as it relates to raising interest rates. And an interest rate sensitive category that stands at the front lines of this issue is the U.S. Treasury market. What should investors realistically expect from their U.S. Treasury allocations and subsequently the bond market if the Fed follows through with its recently hawkish tone?

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Where Is The Wall?

One of the many narratives put forth about the recent stock market rally has been the massive wall of money rotating out of bonds and into stocks. Certainly, the surge in the U.S. stock market coupled with the decline in the U.S. Treasury market has supported this narrative. But what are the real underlying drivers of this phenomenon? And is this something that investors should view as bullish or a cause for concern instead?

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Tales From The Yield Curve

Here is the current narrative. The new administration, along with its like-minded counterparts in Congress, will be bringing pro-growth policies such as individual and corporate tax cuts, the slashing of regulations, and deficit ballooning infrastructure spending among many other goodies for the U.S. economy. The anticipated results from this transformational shift in Washington will thus be above trend economic growth and the outbreak of higher inflation. It will be interesting to see if this all indeed plays out over the coming year. But what is becoming increasingly notable is that tales from the yield curve are not necessarily supporting this narrative.

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There You Go Again

The opinion is virtually unanimous. Growth is accelerating. Inflationary pressures are on the rise. The U.S. Federal Reserve is going to raise interest rates twice if not three times next year after what was interpreted as a more hawkish tone from the Fed on Wednesday. Bonds along with dividend paying stocks are set to take a drubbing as a result. Troubling sentiments indeed for the more conservative investor.  But history is rhyming once again.  Beware the consensus, particularly when it’s laced with hubris.  Be a contrarian.

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