The Week Ahead – The Rising Tide

Welcome to “The Week Ahead” where we take a moment to provide our thoughts on what we can expect in markets and the economy during the upcoming week.

Last Friday the 10-year U.S. Treasury yield closed at 2.96%. The last time the 10-year U.S. Treasury yield closed at 3% or above? It’s been awhile – January 8^th, 2014. In the front end of the yield curve, the 2-year U.S. Treasury yield closed at 2.46% on Friday, double what we saw just a year ago. Toward the latter half of last week as the yield curved flattened, equity markets began to take notice. Historically, an inverted yield curve (where the front end of the curve has higher yields than the long end) is a precursor to a recession. In fact, it has been the correct gauge for all recessions since 1960. Now, with the history lesson out of the way, the market has also seen long periods of a sustained flat yield curve including between 1994-2000, the greatest stock market run in history. The current economic cycle that we are in, aka the post-great recession period, has been unique in so many ways: quantitative easing (multiple times), zero interest policy, and bailouts. It’s hard to say that the playbook from the past can be used for today’s economy. Higher rates could be stomached by investors if the economy continues to show improvement and growth. We’re coming close to having the longest bull run in history, but it definitely hasn’t been a sprint this time like years past – it’s been a slow grind.    

In the week ahead investors will be looking to the GDP (advance estimate) reading for the first quarter of this year. After averaging about 3% growth over the prior three quarters, it wouldn’t be surprising to see some slowing for the first quarter as we’ve seen a pattern of weaker first quarter readings over the last few years.

Data deck for April  21 – April 27: