Bears are a pessimistic lot, preferring to look at the glass as half-empty. Markets, investing, earnings and inflation are all used to build the argument for a bear market, right or wrong. In most cases, their position is wrong. They may be far too early or too late, but sometimes they are right (for a short while anyway).
So that brings us to today.
Is there a case for a bear market?
The current argument for a bear market centers around interest rates and bond yields. Strikingly, the bear camp tries to frame their position on the 2/10 year spread, which has narrowed considerably from a year ago. This spread is roughly 45bps, which by historical standards is quite small. (A year ago, the spread was around 150bps.)
This narrowing indicates inflation coming into the system (it also underscores that the Fed’s rate hikes are not based on smoke and mirrors – but that’s another blog post). The bears believe an inversion will bring more sellers into the stock market, because an inversion of the curve historically leads to a recession.
However, my friends Tony Dwyer of CanaccordGenuity and Ryan Detrick of LPL Financial postulate that recessions often come many months after an inversion. Even if it does occur, the stock market is enjoying robust growth of double digits. The bear case doesn’t hold water here.
Additionally, the 10-year bond yield has been trying to find comfort around the 3% level, and that has people worried. Ask a bear, and they’ll say that when yields rise, the cost of money and the cost of servicing debt goes up. While this rings true, let’s remember that 3% is half of what the 10-year yield was in 2007/08, before the financial crisis.
If you take a position – bull or bear – you can always find data to support your thesis. However, it’s important to keep things in perspective. While interest rates and bond yields may change, there is no need to poor cold water on the markets just yet.