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Stocks Mixed As Market Tries To Consolidate Recent Moves

Stocks closed narrowly mixed yesterday after the market's disappointing close on Friday.

Concerns over economic slowdowns overseas, particularly in China and in Europe, gripped the market last week.

And so did the longer than expected trade negotiations between the U.S. and China. (President Trump and President Xi were unofficially expected to meet in March, then in April, and now it might be pushed out to June.) Although, U.S. Trade Representative Robert Lighthizer and Treasury Secretary Steve Mnuchin are back in Beijing this week for more high-level talks, which is a good sign of continued progress.

But the latest boogeyman that gripped the market last week was the yield curve inversion. We saw a brief inversion in December of last year (the 5-year Treasury yield dipped below the 3-year Treasury yield), and that was supposed to be the end of the market as a recession was sure to take place. (Yawn.) Meantime, the economy continued to strengthen while employment got even better and the market surged. But we were then told that inversion wasn't the important one.

Fast forward to Friday when the 10-year Treasury yield dipped below the 3-month Treasury yield. That one, we're being told, is the one to watch. (Really?) And the ridiculous recession talk popped up again. (Sigh.) But don't believe it.

Fed Chair Jerome Powell was asked about the yield curve inversion a short while ago and he downplayed the suggestion of recession. He noted that in the past, "inflation was allowed to get out of control, and the Fed had to tighten, and that put the economy into a recession." "That's not really the situation we're in now."

Indeed. While the economy is humming at a strong pace and the jobs market is the strongest it's ever been, inflation remains subdued, still missing the Fed's 2% target. And with the Fed just last week indicating that they are likely to hold rates steady for the rest of the year (the mid-point Fed Funds rate is 2.375%), the Fed is not going to tighten the economy into a recession anytime soon. In fact, over the last 50 years, there's never been a recession with the Fed Funds rate under 4%.

But those panicking over the yield curve inversion and predicting doom and gloom for the market are missing some very important stats.

Looking at the last three inversions (1989, 1998, and 2006), the S&P soared afterwards with the average gain, from the first inversion to the ultimate high, being 35%. And the average time frame was 16 months.

Anybody running for the hills after Friday's inversion is likely to miss out on what could be a pretty sizable move.

Forget the yield curve inversion.

The best things to watch are the economic reports and employment numbers.

And for now, it shows no recession on the horizon. Quite the contrary, it shows a strong economy and it portends a continuation of this record bull market.

See you tomorrow,

Kevin Matras

Executive Vice President, Zacks Investment Research


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