President Trump often touts the buoyant stock market as an indication his economic policy success. In so doing, he chooses to ignore the much gloomier message that the bond market is now sending us as to where the U.S. economy might be headed.
Exclusively relying on the stock market as a measure of economic health could cost President Trump dearly in the run up to the 2020 election. This would especially seem to be the case considering how much more accurate an economic forecaster the bond market rather than the stock market has been.
The stock market has no track record of predicting economic recessions. The same, however, is decidedly not true of the bond market. Indeed, when long-term interest rates have remained consistently below short-term interests, they have accurately predicted each of the last nine U.S. economic recessions.
Choosing the right financial market on which to base one’s economic forecast is particularly important today when the stock market and the bond market are taking diametrically opposite views as to where the U.S. economy might be headed.
While U.S. stock markets are hitting new record highs and are partying like there is no tomorrow, the bond market is now signaling that real trouble might lie ahead for the U.S. economy.
A clear indication that the U.S. bond market is worried about the possibility of an economic recession is that U.S. long-term interest rates are significantly below short-term interest rates. Following a drop of more than 1 percent over the past year, 10-year U.S. Treasury bond yields recently dropped to below 2 percent, which is less than the Fed’s short-term interest rate target of 2.25-2.50 percent.
This so-called yield curve inversion implies that the bond market is expecting that, over the next year or so, the U.S. economy will weaken to such an extent that the Fed will be forced to make several interest rate cuts.
If the U.S. bond market is worried about where the U.S. economy is headed, the European bond markets are positively petrified as to where the European economy might be headed. As if to underline this point, a record $5 trillion, or around half, of European government bonds now offer negative interest rates.
(Bloomberg) — Economic confidence among chief executive officers at U.S. small and midsize businesses stumbled in the second quarter to the lowest level in nearly a decade on worsening views of current conditions and a dimmer outlook.
The Vistage CEO Confidence Index decreased 3.2 points in the second quarter to 88.4, the lowest level since the last three months of 2009, a report by Vistage Worldwide Inc. showed Thursday. Some 31% of respondents said economic conditions had recently improved, down from 64% a year ago, while only 13% expect an improvement in the next 12 months.
“Damage done to the economy from the tariffs, the slowdown in job growth as well as heightened economic uncertainty has been substantial,” said Richard Curtin, director of the University of Michigan’s consumer sentiment survey, who analyzed the data. “Despite these concerns, firms still held net favorable views that the Trump administration has helped their business.”
The Vistage survey contrasts with consecutive months of improvement in the National Federation of Independent Business’s small-business optimism index, which climbed in May to a seven-month high.