Harrison: Prepare For The Worst

Your Real Vision Daily Briefing for June 22, 2020

Ash Bennington and Ed Harrison explore the perilous state of the global markets amid the unrelenting spread of coronavirus.

  • The bond market leads the equity market in pricing downside risk and telegraphing economic signals; it is currently pricing in more pessimism.
  • The 10-2 Year Treasury Yield Spread is turning into a bull flattener.
  • 97% of S&P stocks traded above 50-day moving average – the highest level in 10 years – which could mean a period of gains down the road.

GET REAL VISION'S FREE DAILY BRIEFING DELIVERED DIRECTLY TO YOUR INBOX EVERY DAY AFTER MARKETS CLOSE

Get the latest information as we analyze the next phase of our new global economy and discuss what we think is to come.

While the equity market is all about making outsized returns, the bond market sniffs out risk and protects capital, so investors would be wise to understand what the “smart” money is thinking and doing, Ed Harrison said during today’s Real Vision Daily Briefing.

Harrison said that because the bond market is geared toward mitigating downside risk, it can be a useful indicator. In early June, the market was reflecting optimism about the economy, but now the spread between the 2-year and 10-year charts is flattening. If it continues to flatten, it may be telling us that the economy is not as robust as expected when the reopening started.

This less optimistic picture dovetails with what we’re seeing on the virus front, as a “second wave” of coronavirus in the U.S. and around the world threaten to negatively impact economic growth.

Harrison said he believes we will see the knock-on effects of the disturbing rise in cases through the summer and into October. Specifically, he sees trouble for corporate real estate, earnings, and unemployment, and said that he expects the equity market will look to be overvalued as it is today.

On a more positive note, Harrison discussed the recent news that 97% of S&P stocks are trading above their 50-day moving average. This very wide market breadth is seen as a positive technical indicator and it could portend a period of gains down the road.

The question is how long those positive returns may last. Will we get stopped out in September or October, or could we be on the verge of a five to 10-year upturn? Only time will tell, but considering that we are at the worst point in the pandemic, and the market is not priced for some of the downside risk we face going forward, Harrison offered a bit of advice.

“Hope for the best but prepare for the worst,” he said.