Early Friday futures action shows Wall Street won\u2019t break a three-day losing streak. No surprise why: bond yields, which have enjoyed a tight inverse correlation to stocks of late, remain near recent highs.<\/p>\n
At least benchmark long-term interest rates near multi-year peaks suggests the market is sanguine about the health of the U.S. economy. The dominant narrative among investors is that it has been able to absorb the Federal Reserve\u2019s sharp hike in borrowing costs without cracking \u2014 the so-called soft landing.<\/p>\n
However, for it to be true that the U.S. economy can avoid a contraction in coming quarters we must accept that the predictive recession message of a deeply inverted yield curve \u2014 where short-term Treasury yields are notably higher than 10-years \u2014 can now be dismissed by equity investors.<\/p>\n
That would be a mistake, says Michael Darda, chief economist and market strategist at Roth MKM. <\/p>\n
Darda has examined seven-decades of the yield curve and how it relates to the business cycle and equity market performance. Using the spread between 10-year
\n BX:TMUBMUSD10Y
\n and 1-year
\n BX:TMUBMUSD01Y
\n bond yields he found there have been 12 inversions since the 1950\u2019s.<\/p>\n
<\/p>\n Importantly, during these occasions the inversion was shown to have preceded the eventual recession by a wide range of between seven to 25 months, with an average lag of 14 months. <\/p>\n \u201cA look back through the financial news pages shows that soft landing stories were common and the yield curve signal was dismissed going into the 1990-1991, 2001, 2007-2009, and 2020 recessions.,\u201d he says. <\/p>\n \u201cSince we are currently 13 months into inversion, it is woefully premature to presume the yield curve has given a false signal and the fabled soft landing is in the bag,\u201d Darda adds.<\/p>\n The crucial issue for equity investors is that they should be wary of the average double-digit percentage point stock market rallies that come in the immediate aftermath of an inversion.<\/p>\n That\u2019s because Darda\u2019s research shows in nearly seven decades there has never been a post-inversion equity rally that was not completely reversed going into subsequent recessions\/bear markets.<\/p>\n <\/p>\n Not even recent action is unprecedented. U.S. stocks rallied 20% from when the yield curve inverted in July 2022 to July this year. But such bounces have happened before, in 1989-1990, for a gain of 24%, and 2006-2007, up 23%, and both times the post-inversion rallies were wiped out.<\/p>\n \u201cOn average, equity markets \u2018bottomed\u2019 about 20% below where they were when the curve first went into inversion. The range of outcomes would be consistent with the S&P 500 having more than 20% downside from the recent market highs,\u201d Darda says.<\/p>\n \u201cIn short, those who are \u2018doubling down\u2019 on the soft landing\/ongoing bull market call now are making a wager on an unprecedented occurrence.\u201d<\/p>\n <\/p>\n U.S. stock-index futures YM00, NQ00, For more market updates plus actionable trade ideas for stocks, options and crypto,\u00a0<\/strong>subscribe to\u00a0MarketDiem by Investor\u2019s Business Daily<\/strong>.<\/strong><\/p>\n U.S. economic data on Friday, include the July wholesale inventories report, due at 10 a.m. Eastern, the nation\u2019s quarterly financial accounts at noon, and July consumer credit at 3 p.m..<\/p>\n Fed Vice Chair for Supervision Michael Barr is speaking at 9 a.m., and San Francisco Fed President Mary Daly is due to speak at 11 a.m.<\/p>\n The SEC is investigating Ryan Cohen\u2019s Bed Bath & Beyond trades, says the WSJ.<\/p>\n DocuSign Inc. shares Shares of RH Trading in Hong Kong was shut after the region suffered the heaviest rainfall in 140 years.<\/p>\n South Korean film industry rocked by box office fraud allegations.<\/p>\n The $100 billion luxury complex that\u2019s sitting empty and unfinished.<\/p>\n Elon Musk ordered Starlink to be turned off during Ukraine offensive, book says.<\/p>\n It\u2019s well known that when Apple shares fall, their roughly 7% weighting in the S&P 500 means the market in aggregate tends to suffer. But as the table from Vanda Research shows, it\u2019s notably worse for the portfolio\u2019s of retail investors. They\u2019ll be really hoping nothing bad happens to Tesla <\/p>\n \u201cTesla continues to draw the most inflows, with AMZN, AAPL, Here were the most active stock-market tickers on MarketWatch as of 6 a.m. Eastern.<\/p>\n This man tried to cross the Atlantic in a hamster wheel.<\/p>\n Mysterious \u2018golden orb\u2019 at bottom of ocean baffles scientists.<\/p>\n And speaking of gold, Norwegian amateur\u2019s \u2018find of the century.\u2019<\/p>\nMarkets<\/h2>\n
\n ES00,
\n
\n
\n
\n are lower as benchmark Treasury yields
\n BX:TMUBMUSD10Y
\n dip slightly. The dollar
\n DXY
\n is little changed, while oil prices
\n CL.1,
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\n rise and gold
\n GC00,
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\n gains.<\/p>\nThe buzz<\/h2>\n
\n DOCU,
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\n are up 3% in premarket trading after the e-signature company topped earnings expectations and hiked its guidance.<\/p>\n
\n RH,
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\n the furniture retailer formerly known as Restoration Hardware, are down more than 8% after the company warned that the higher-end housing market that the company depends on would likely remain rocky. <\/p>\nBest of the web<\/h2>\n
The chart<\/h2>\n
\n TSLA,
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\n too.<\/p>\n
\n NVDA,
\n
\n
\n
\n and
\n AMD,
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\n trailing from a distance. Importantly, given Apple\u2019s popularity among individual traders, as the stock goes, generally so does the S&P and, with that, so can retail investors\u2019 wealth effects,\u201d says Vanda.<\/p>\nTop tickers<\/h2>\n
\n
\n \n Ticker<\/p>\n<\/td>\n \n Security name<\/p>\n<\/td>\n<\/tr>\n \n \n TSLA,
\n \n Tesla<\/p>\n<\/td>\n<\/tr>\n \n \n AMC,
\n \n AMC Entertainment<\/p>\n<\/td>\n<\/tr>\n \n \n AAPL,
\n \n Apple<\/p>\n<\/td>\n<\/tr>\n \n \n NVDA,
\n \n Nvidia<\/p>\n<\/td>\n<\/tr>\n \n \n GME,
\n \n GameStop<\/p>\n<\/td>\n<\/tr>\n \n \n NIO,
\n \n NIO<\/p>\n<\/td>\n<\/tr>\n \n \n TTOO,
\n \n T2 Biosystems<\/p>\n<\/td>\n<\/tr>\n \n \n AMZN,
\n \n Amazon.com<\/p>\n<\/td>\n<\/tr>\n \n \n VFS,
\n \n VinFast Auto<\/p>\n<\/td>\n<\/tr>\n \n \n MULN,
\n \n Mullen Automotive<\/p>\n<\/td>\n<\/tr>\n<\/table>\n Random reads<\/h2>\n