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Our strategists share insights into the opportunities that can appear late in a bull market.
Recessions are not easy to predict, but we believe the specific headwinds of this cycle may provide investors with warning signs to monitor.
In 2019, rapidly growing investor demand for longer-term bonds drove their yields lower than those of some shorter-term bonds. This is a yield-curve inversion, and it can push the rates that banks earn on long-term loans lower than the short-term rates that they pay on deposits. In this way, the inversion undercuts bank profits and reinforces the pressure on the economy. Yield-curve inversions are often one of the more predictive indicators of recessions.
Geopolitical uncertainties—such as the U.S. and China trade dispute, the growing U.S. political divide, Brexit, and tensions in the Middle East and North Korea—may disrupt the global economy. Sustained geopolitical uncertainty could continue to dampen sentiment, potentially triggering a sustained economic downturn.
Increasingly higher yields for non-investment-grade bonds relative to U.S. Treasury securities of comparable maturities may signal stress for lower-quality debt. Currently, only a few sectors of the high-yield corporate market—particularly the Energy sector—are experiencing these higher spreads.
During this expansion, absolute debt levels have risen, yet signs of stress are not evident at this time. Household debt/GDP ratios remain elevated compared with historical levels but are lower than they were before the Great Recession.
We see a significant risk for two potential policy mistakes. First, the Fed may fail to cut interest rates sufficiently for a slowing economy that faces heightened political uncertainty. Second, there is a risk that the Fed exhausts effective monetary tools to fight the next recession.
This index of 10 market and economic indicators can be used as a barometer of early signals of slowing growth. The LEI is slowing, as it did twice earlier in this expansion (in 2012-2013 and 2016). However, during those earlier slowdowns, the headwinds were less concerning to us than they are today. This suggests the risk of a recession is rising, along with the potential for a bear market over the next 12 to 24 months.
For more insights, including growth-oriented strategies and considerations for those nearing retirement, download the full report.
The full “How Bull Markets End” report from Wells Fargo Investment Institute includes:
For additional insights and market commentary, visit our website. For assistance with your investment planning or to discuss the points in this report, please talk to your investment professional.
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