Wall Street’s fear gauge has been rising at an accelerated rated according to CNN’s Fear and Greed Index. The index scale is from zero to 100, with zero representing extreme fear and 100 reflecting utter euphoria. A month ago, the index measured 65, well in the greed camp. Today, the index is at 30, down 35 points, and has moved well into the fear category.
Goldman Sachs Strategist recently warned of a high risk of a correction. J.P. Morgan (JPM) is asking investors to remain patient with more volatility to come. Blackrock’s CEO said, “Stock prices do not match up with conditions in the economy.” Even the Fed questioned market valuations in its most recent meeting minutes. So, is the current run nearing the tipping point?
Chief Investment Strategist, Sam Stovall, reminds investors that Bull Markets do not die of old age; they die of fright. A recession frightens a bull. There are several leading indicators that economists monitor to predict market downturns and recessions. One of the most sought after indicators to predict recessions is the “yield curve”-the difference in the spread between the ten-year Treasury note and the three-month Treasury bill. According to research conducted by the New York Federal Reserve, whenever the spread turns negative, i.e. the T-bill rate is higher than the T-note rate, caution is warranted. When the rate exceeds -1%, the likelihood of a recession is 60%; if the rate hits -2%, the probability increases to around 90%. Currently, the spread between the ten-year note and three-month bill is positive 1.7%. That puts the likelihood of a recession at less than 5% according to the Fed’s research.