‘Don't Panic’ the Mantra as Low Yields Don't Mean Stock Collapse
‘Don't Panic’ the Mantra as Low Yields Don't Mean Stock Collapse
(Bloomberg) -- A drubbing in world shares bled into a second day Monday, sparked by worrying signs for the global economy and reinforced by dramatic moves in the bond market. Yet some investors may have pushed the panic button too early.
At first glance, there are harbingers of recessionary doom everywhere. The U.S. curve has inverted, yields in Australia and New Zealand are at record lows, and the global pile of negative-yielding debt is rapidly growing again. So it’s small wonder traders are pulling back from stocks.
But there’s an alternative prognosis: that we’re witnessing a reinstatement of the friendly low-rate environment that sent equities to records in the first place.
“As long as central banks have our back, there’s no serious problem,” said Bryan Goh, executive director and chief investment officer for Singapore at Bordier & Cie.
Those cross currents were seen last week, when the Federal Reserve said it planned to hold off on interest-rate hikes for the rest of the year. The S&P 500 Index closed lower that Wednesday, before jumping the next day on newfound optimism about the dovish turn.
And then came the inversion. U.S. equities plunged on Friday as three-month bills yielded more than 10-year Treasuries for the first time since 2007, with manufacturing data from Europe adding to the gloom. That tone continued in Asia on Monday, with share gauges from Tokyo to Hong Kong and Shanghai sinking at least 2 percent.
“We have to continue to remind ourselves that an inverted yield curve doesn’t cause a recession -- it’s just a good indicator that one is coming," said Kristina Hooper, chief global market strategist at Invesco Ltd., in a note. “And let’s not forget there’s often a long lag time between inversion and recession. Investors should not be panicking.”
In the past 35 years, such a signal has preceded the three U.S. recessions by an average lead time of more than 15 months, while producing one false positive, according to data compiled by Bloomberg.
Renewed worry about how long the global economy can stay in the current Goldilocks state -- when growth is neither fast enough to spur monetary tightening nor weak enough to risk a slowdown -- is consuming equity investors at the end of a profitable quarter. Even after the two-day drop, the MSCI All-Country World Index is up more than 10 percent since the start of the year.
A closer look at the competing factors surrounding the inversion shows the difficulty of making that determination. The long-running U.S. bull market has in the past year weathered a partial government shutdown, some mixed messages from the Fed, as well as ongoing headwinds from trade tensions with China and growing political fragmentation.
And underpinning the U.S. economy’s resiliency, meanwhile, is a solid labor market that continues to drive consumption. More workers are coming back to the jobs force, and while the effects of last year’s tax cut are fading they are being offset by higher government spending.
And valuations remain relatively subdued. The price-earnings ratio for the index stands at 16.6, still well below the most recent high of 21.3 in 2016.
“A lot of people are looking to call a top in equities, as is normal on days like this,” said Nick Twidale, chief operating officer at Rakuten Securities’ Australian unit. “However, it could just be a healthy clear out and we resume topside moves later in the week.”
To contact the reporters on this story: Eric Lam in Hong Kong at elam87@bloomberg.net;Min Jeong Lee in Tokyo at mlee754@bloomberg.net
To contact the editors responsible for this story: Sarah Wells at smcdonald23@bloomberg.net;Divya Balji at dbalji1@bloomberg.net;Christopher Anstey at canstey@bloomberg.net
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