There is a very famous stock market anecdote. It says that the stock market has predicted nine of the last five recessions. Well, we are not trying to make fun of stock market's forecasting ability. In fact, we believe that it is one of the best indicators of economic movements. And that too in both directions. In other words, stock markets more often than not peak a few months before the recession sets in and they also bottom out few months before the recession ends. There have been quite a few historical evidences to prove this. Thus, stocks could well be one of the best economic indicators around.
Have you ever wondered what the predictor of the stock markets themselves is? To put it even more simply, do you know what marks the end of a bull run and the beginning of a bear market in stocks? David Rosenberg, one of US' top strategists perhaps has the answer. Rosenberg talks of a particular indicator and he believes that this metric signaled in 1990, 2000 and 2007 that a steep drop in stocks is only two months away.
This indicator is nothing but the yield on the 10-year US Treasury bond. As per Rosenberg, the yield on the 10 year note hit its nearby peak on April 5, 2010 and has gone on to plunge more than 120 basis points since. Whenever such a scenario has developed during the last three major bull runs, a steep drop in stocks has only been two months away.
"Declines of this magnitude very often presage the onset of bear markets and recessions. Typically, equities and then economists are late to the game...What is key to note is that the bond market is the tail that wags the stock market's dog-it leads", Rosenberg is believed to have said.
We do not know for sure whether the bear market in stocks is round the corner or not. However, evidence does point towards this fact. With the effect of the stimulus waning away, the US economy has begun to struggle yet again and may even contract during the second half of the current calendar year. This certainly does not bode well for corporate earnings which in turn could put pressure on stock prices. Thus, it turns out, the 10 year note could prove to be correct yet again.