Dario Perkins digs deep into the reasons why bond markets are better indicators of forthcoming recessions than equities.
Not only is the global economic outlook becoming more uncertain, but bonds and equities appear to be ‘saying’ different things about the future. Plunging long-term interest rates and inverted yield curves seem to signal recession from bond markets, but global stocks are close to record highs and earnings expectations remain elevated. History suggests the bond market is more likely to be right, with US inversion a particularly ominous sign for global stocks. Equity investors must hope pre-emptive policy easing from the world’s central banks (especially the Federal Reserve) will be enough to head off a more serious downturn, as in the 1990s. But it could require more than a few insurance rate cuts to restore global confidence and growth.
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