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What the Yield Curve Means for Stock Bull Markets

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Countdown to Catastrophe? What the Yield Curve Means for Stock Bull Markets

A key portion of the U.S. Treasury yield curve has inverted, an ominous sign for the economy and the stock market. But what investors should do about it now is a complicated question.

Looking at history, after the spread between two- and 10-year Treasury yields first turned negative 10 times going back to 1956, the S&P 500 topped out anywhere from two months to two years later, according to data compiled by Bank of America strategists. Often, bailing immediately after the signal flashed meant missing out on double-digit gains.

“It’s a great recession indicator. It just happens to work with a lag,” Tony Dwyer, Canaccord Genuity’s chief market strategist, said by phone. “Acting on it now is inappropriate.”

For the first time since 2007, the rate on 10-year Treasury notes dipped below those of 2-year notes Wednesday, sounding alarms across global financial markets. The signal from the bond market has preceded each of the last seven recessions.

Six of the last 10 times the yield curve inverted, the S&P 500 rolled over within three months. In the other four, the gauge didn’t top out until at least 11 months passed, data compiled by Bank of America show. The wide range of possibilities muddies the waters for stock investors that consider the yield curve when allocating portfolios.

The S&P 500 “can take time to peak after a yield curve inversion,’’ strategists at the bank, including Stephen Suttmeier, wrote in a note to clients this week. But ultimately, “the equity market is on borrowed time after the yield curve inverts.”

If you took the yield curve’s first inversion prior to the 2008 financial crisis as a signal to sell, you were probably glad. Yes, you missed a nearly 25% advance between Christmas 2005 and the top of the bull market 22 months later. But just five months after that, your gain had shrunk to 4%. Holding on through the whole bear market left you gutted — down 46%.

Then again, five years later you were back to even. Ten years later you were sitting with a 64% gain.

It’s a different story for the initial inversion that came before the dot-com bubble burst. The spread turned negative briefly in May 1998, and the S&P 500 went on to rally almost 40% through the bull market peak. While that gain would’ve turned to a loss of 30% just 2 1/2 years later at the market bottom, you still would’ve seen double-digit negative returns five years after the first signal.

Still, timing the market isn’t easy and it can be tempting to hold on, especially since the S&P 500 usually enjoys a last gasp rally after the initial yield curve inversion. Sure, the S&P 500 has fallen an average of roughly 5% in the immediate aftermath of an inverted yield curve, but the comeback has been stronger, rallying almost 17% on average in the 7 months after the initial negative reaction, according to Bank of America.

Major equity benchmarks plunged Wednesday after key parts of both the U.S. and U.K. yield curves inverted, stoking further concerns over weak global growth. The S&P 500 fell 2.3% as of 1:45 p.m. while the Dow Jones Industrial Average lost near 500 points. U.S. 30-year Treasury yields also fell to record lows.

At Crossmark Global Investments in Houston, which manages $5 billion, the team is keeping an eye on the curve, but not yet taking the signal too seriously. Victoria Fernandez, the firm’s chief market strategist, notes that the consumer is still strong, and until retail sales data or other indicators start to deteriorate, she’s not worried a recession is imminent.

Still, rates on longer-dated bonds falling to record lows is concerning, and the stickiness of the latest yield curve inversion is well worth paying attention to, she said. “If we had a true inversion of the yield curve that stuck for a while — if we saw an inversion go for a quarter and those consumer numbers start to come down as well, we see that GDP start to contract, if we see that, then maybe we add a little bit of cash.”

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Telus email still down heading to the fifth day

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For the fifth day in a row, customers with Telus.net emails are still facing disruptions as the company works to fix ongoing issues.

“Telus technicians continue to work to restore access. This is a fluid situation, and we are doing everything we can to stabilize all servers to bring our final clients online,” said a spokesperson in a statement. “This is taking longer than we would like as remaining issues are very complex. We are incredibly sorry.”

Customers began noticing an issue with their emails on Aug. 15, and while the majority of users had service restored by the next day, plenty have still been left without the service.

The issues are said to affect customers in the Lower Mainland, Kelowna, Vernon, Edmonton, Calgary and more. The majority of customers that have reported an issue with Downdetector say only their email has been affected, but some say there is also a problem with internet usage.

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Ontario Cannabis Store returns $2.9M in CannTrust products

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CannTrust

VAUGHAN, Ont. – CannTrust Holdings Inc. says the Ontario government‘s cannabis retailer is returning all of the company’s products it has because they do not conform with the terms of its master cannabis supply agreement.

The company says the total value of the products is about $2.9 million.

The move by the provincial retailer comes as CannTrust faces problems with Health Canada.

The federal regulator found problems at the company’s greenhouse in Pelham, Ont., earlier this year and later raised issues regarding a manufacturing facility in Vaughan, Ont.

Health Canada has placed a hold on CannTrust’s inventory including approximately 5,200 kg of dried cannabis and the company has also instituted a voluntary hold of approximately 7,500 kg of dried cannabis equivalent.

CannTrust noted that the Ontario retailer operates independently of Health Canada, which has not ordered a recall on any of the company’s products.

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OPEC downgrad its forecast for global oil

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In its latest report, OPEC only slightly downgraded its forecast for global oil demand, lowering it to 1.10 million barrels per day (mb/d) for 2019, down only a minor 0.04 mb/d from a month earlier. That estimate could end up being too optimistic, and OPEC itself said the forecast is “subject to downside risks stemming from uncertainties with regard to global economic development.”

Notably, OPEC said that global supply could grow by 1.97 mb/d this year, significantly outpacing demand growth. Still, that figure is down by 72,000 bpd from a previous estimate, due to lower-than-expected production growth in the U.S., Brazil, Thailand and Norway.

In another worrying sign of a brewing supply surplus, OPEC said that oil inventories in OECD countries rose by 31.8 million barrels in June from a month earlier, rising to 67 million barrels above the five-year average. In other words, just as OPEC+ was meeting to extend the production cuts for another 9 months, inventories were rising, an indication of an oversupplied market.

On a slightly positive note (for OPEC), the group revised up demand for its crude by 0.1 mb/d for both 2019 and for 2020. Still, it said that demand for its oil, often referred to as the “call on OPEC,” would drop to 29.4 mb/d in 2020, down from 30.7 mb/d this year.

Based on those numbers, OPEC+ is staring down a serious supply glut next year absent further action. The group can either stick with current production levels and risk another market downturn, or it can swallow further production cuts.

What happens next is largely outside of OPEC’s hands. Recent price movements are almost entirely the result of shifting sentiments regarding the global economy. “The yo-yoing on the oil market continues and the oil price remains highly prone to fluctuations. After sliding massively on Wednesday, Brent was hit hard once again [Thursday], shedding over 3% in a matter of hours,” Commerzbank said in a note on Friday. “The oil price currently remains at the mercy of expectations for the global economy, and is thus caught between economic concerns and hopes that the trade dispute might end soon.”

U.S. retail sales eased some concerns on Friday, but the global backdrop remains worrying, and a steady release of data from around the world continues to point in a negative direction. Just in the last week, there was the inverted yield curve for U.S. treasuries, a stock market and currency meltdown in Argentina, volatile oil prices, and widespread fears of a global economic recession.

Even the U.S. is not immune, despite mostly healthy data up until recently. For instance, Wall Street analysts have slashed their outlooks for corporate earnings for the third quarter in recent weeks. “Everyone in April and through the beginning of May thought that the economy was going to get better in the back half of the year, trade war was going to sort of settle, certainly not escalate,” Eastman Chemical Chief Executive Mark Costa said on an earnings call last month, as the WSJ reported. “And now we’re just in a very different world where I don’t think that’s true…There’s not a lot of signs of economic recovery coming in the second half.”

Ultimately, the U.S. will struggle to outrun a global slowdown. The World Trade Organization (WTO)  painted a bleak picture for the third quarter, saying that trade volumes are “likely to remain weak.” The global auto sector has been hit hard this year, with a sharp contraction in China, India and Germany. The U.S. auto industry is starting to show some signs of strain as well.

The problem for oil prices is that the outlook for 2020 is already pretty bearish, with supply growth outpacing demand. That’s the base case right now. But the odds of economic recession continue to grow, which threatens to make the supply overhang that much worse.

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