Yield Curve Warning: Are We Headed for Boom or Bust?

The US yield curve has un-inverted after 700 days – the longest stretch since 1929. Yeah, that 1929.

An inverted yield curve slowly chips away at the economy, making it vulnerable to shocks.
Historically, recessions tend to follow these inversions like clockwork.

But here’s the kicker: Despite this red flag and other signs of economic weakness, we haven’t seen the big shock to trigger a recession yet.

In fact, the economy’s been holding up surprisingly well.

United States Yield Curve

Welcome to One of the Most Expensive Markets in History

This resilience has driven the stock market to one of its most expensive levels in history, surpassing 1929 and nearing the highs of 1999.

Remember what followed those dates? Extreme market crashes.

Shiller PE

But it’s not just stocks…

The Housing Market’s Unprecedented Heights

The U.S. housing market is at its most expensive level in recent financial history.

The price-to-income ratio has hit a jaw-dropping 7.7.

That’s about TWICE as expensive as the 40-year period from the 1960s to 2000s!

Housing is Expensive

The Fed’s Dilemma: A High-Stakes Balancing Act

As a result, the Federal Reserve is caught in a dilemma:

Cut rates? Risk inflating the already massive asset bubbles. Since pausing rates in October 2023, the S&P 500 has surged 40% in just 9 months, similar to 1929, 1987, and 1999.

S&P 500 Index

Hold steady? Potentially trigger a severe recession. Remember, after 2008, Ben Bernanke admitted they should’ve cut rates sooner.

With rates at their highest since 2008, the Fed is likely to cut throughout 2024.

Markets are already pricing in this expectation. The 2-year yield is a strong indicator of what the market thinks the Fed will do.

Historically, the 2-year yield tends to drop before the Fed actually cuts rates. We’re seeing that play out again right now.

Fed Funds Above 2-Year Treasury Yield

Typically, the markets have an inverse correlation with Treasury yields.

Falling yields = significant market rallies (as we saw in 2023-2024)
Rising yields = significant market declines (as we saw in 2022)

S&P 500 & 2-Year Treasury Yield

The falling 2-year yield indicates market expectations for rate cuts. Could this signal a possible stock market mega bubble with crazy extreme valuations?

That’s exactly where the MOVE index comes in.

The MOVE Index

It shows the volatility of interest rates over time = bond market uncertainty

Currently it is elevated, but not at crisis levels.

And here’s the kicker: S&P 500 valuations closely mirror an inverted MOVE index.

If bond uncertainty falls, stock valuations could go even higher. This insight has driven our strategy since late 2023, leading to some incredible trades for our clients.

Access our 2024 track record on our website.

Shiller PE and Move Index

The Big Question: Mega Bubble or Market Turn?

We’re now at an important crossroads:

Bond uncertainty could fall further, pushing stocks to insane valuations.
Or, the MOVE index might reverse, signaling a potential market downturn.

Remember: When the recession finally hits, it could trigger massive bond market uncertainty and declining stock valuations – think 2008 all over again.

Shiller PE and MOVE Index