How betting on a recession could wreck the market
A popular phrase among investors and analysts is “the bond market is always right.” From predicting downturns to the Federal Reserve’s next move, the bond market’s historical forecasting track record and its “wisdom of the crowd” quality have given it a near-mythic reputation among Wall Street analysts.
Given that popularity, it’s important in the economic-forecasting business to pick your battles with it wisely. That said, it’s also important to acknowledge when the bond market is off base, because when the market’s expectations run into a vastly different reality, things tend to go haywire — and investors can lose (or make) a lot of money depending on how they’re positioned. And it’s becoming increasingly clear that the bond market is reading the economic tea leaves all wrong.
Right now, the bond market suggests that the economy is on the verge of a hard stop and a recession that will force the Federal Reserve to cut interest rates to stimulate activity. Actual economic data, on the other hand, points to hardly gangbusters but continued growth for the US. And the longer the market expectation diverges from the economic reality, the more painful the market adjustment will be once it happens.
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