Market Analysis

The Ghost of 2001

By now you’ve probably read a gazillion opinions on the inverted yield curve and seen a ton of analogs being discussed. On the yield front the general bullish consensus seems to suggest to simply ignore it. Like everything else. On the analog front I see references to examples such as 2016 (the earnings recession will be temporary) and 1994 (the yield inversion is a fake out and it won’t matter) and similar.  The general consensus: Ignore the inverted yield curve, buy stocks.

My position remains: More open-mindedness and less certitude. How can anyone actually know what is to be ignored and what isn’t?

I suppose if the argument is simply that central banks are dovish and that is good enough then perhaps that is good enough:

And perhaps it is. I don’t know. It’s worked for 10 years, maybe it will work again.

Maybe central banks can once again render all negatives moot. Yet there are a lot of issues to be mindful of and I listed some of these in Chasing Reality and The Reckoning. The macro wheels are turning.

So an inverted yield curve is bullish and you should buy every dip? Let me at least test this theory by looking at a case a lot less mentioned.

Last year I mentioned the 2000/2001 case quite a bit (see also Imbalance).

What was so interesting about 2000/2001? We had a blow-off top move in tech, markets made a major top, there were multiple 10% moves and an increase in volatility and then something unique happened: A yearly low in December. Sound familiar? It should as the ghost of 2001 is making appearances all over this market.

Back then I said, following this analog, we could see a multi-week rally emerge from the December lows and it did. This one here going even farther than back in 2001.

Let me say upfront here, I’m always cautious with analogs because no situation, economy or market is the same and things always change, hence nothing is like for like.

But in light of the similarities and the now found certitude that an inverted yield curve is something to ignore let’s take a quick peak here how conducive that yield curve inversion then was to buying stocks.

Here’s the current situation:

We had a blast off in January 2018 followed by a 10% correction, a top in September, followed by a 20% correction and now a 21% rally for a, currently, lower high, all the while the yield curve flattening and now resulting in an inversion.

As I said no situation is alike, but here’s how all this played out in 2000-2001:

There was a little fake out inversion following the March 2000 top, but then the inversion really got started in July. Yes there were rallies even in the 2 months following the inversion, but as should be clear markets started trending down following a lower high. The recession officially started in March 2001, or a mere 8 months after the initial inversion and the rest is history as $SPX dropped 50% from its highs and didn’t bottom until late 2002.

In this scenario, where was the inversion of the yield curve bullish for equities? The answer is obvious: It wasn’t bullish for equities. Yes you had rallies, but they were opportunities to sell.

Now I’m the first to say I have no clue how this inversion here plays out. Maybe it’s an initial fake out as in April 2000 and that buys equity markets some more time in chopping around, and perhaps we get some more yield curve optimism as we apparently saw in the summer of 2000. Or maybe it all plays bullish as central banks are now dovish and that’s all there is to it.

All I’m saying is this 2000/2001 scenario is a case of an inversion of the yield curve following a very long business cycle and hyper bull market that was not bullish for stocks at all. I don’t see this being discussed anywhere hence I thought it’s worth pointing out.

And perhaps I’ll finish off with another little nugget here. Don’t forget we are at a point of cyclical low unemployment and, coincidental or not, personal interest payments are rising aggressively. Oddly enough that sudden acceleration in personal interest payments coinciding with a cyclical low in unemployment is precisely what we saw during the end phase of the previous two bull markets:

Aren’t analogs fun to ponder?

Look, nobody has access to the holy grail here, but dismissing the yield curve inversion as a fluke or fake out given the history outlined above is to be in denial about the alternative outcome possibilities, hence my tweet this morning:

The ghost of 2001 is all around us. Can anyone else see it, or am I just victim of an apparition? Either way it’s giving me goosebumps hence I’m keeping an open mind.


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