The choppy action points to the deep uncertainty in the financial markets. Is this just a soft spot, like the many others that have survived decades of economic expansion? Or is that something serious?
Jeffrey Sherman, DoubleLine Capital's Deputy Chief Investment Officer, urges investors to be cautious before making any hasty moves – in both directions.
"It's too early to squat." Sherman told CNN Business. But it was not time to add large amounts of risk, he said.
Sherman's boss, the famous investor Jeff Gundlach, said during a webcast Thursday that he sees a 40- to 45-percent chance of a US recession within six months. DoubleLine Capital, which manages assets of $ 1
30 billion, has moved up the credit spectrum as the company assesses the outlook.
The problem is that there are many mixed signals.
In the bullish warehouse, retail sales in the United States rose at a healthy pace in May. Customers who are interested in electronics, home appliances and of course online. Optimism for small businesses recovered to their best level since the fall last month.
And the Trump administration retreated from its fearsome threat of paying tariffs on all goods from Mexico.
But there were many warning signs. Broadcom ( AVGO ) a leading provider of Bellwether chips, dramatically lowered its sales forecast due to trade tensions between the US and China and a "general slowdown" in demand. China's industrial output fell to its weakest in 17 years in May.
And the most disturbing thing is that the bond market is behaving strangely.
The yield curve – the gap between short- and long-term government bond yields – has reversed, signaling that, in the view of investors, Federal Reserve policy has become too restrictive. Inversion has been a reliable indicator of a recession in the past.
"We do not have enough signals yet," Sherman said. "The only thing that lights up red is the yield curve."
These mixed messages complicate Fed chief Jerome Powell, who continues to be pressured by the White House and Wall Street to cut interest rates rapidly.
"At the moment, nobody envies him," Sherman said.
2. Great hopes for Jerome Powell: The stock market is counting on a Federal Reserve interest rate cut sooner rather than later. While the central bank policy update announces nothing new on Wednesday next week, market expectations for a key interest rate cut in July are now 87%, according to the CME FedWatch tool.
Equities rallied on an epic rally last week, fueled by the consequences of hoping for a rate cut that would boost the US economy. It all started with Powell saying the central bank would act appropriately to sustain economic expansion in the United States. In response, the Dow, the S & P 500 and the Nasdaq Composite made the best week of the year.
Tags early embark Investors nervous recession