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August 13, 2020
As tech continues to outperform and almost single handedly support the entire market, we’ve been hearing a lot of discussion in the financial media about this being another “tech bubble.” Given that, we wanted to examine the growing number of similarities between now and the late 1990’s.
Yield Curve: We previously pointed out that the August 2019 inversion in the 10s-2s, the swift rebound that ensued, and now sideways trend in the curve strongly resembles what happened in the late 90s before the bubble burst.
What to look for: The yield curve typically surges at the start of a recession (moving inversely to stocks) as the Fed attempts to “play catch up” and cut rates as quickly as possible to fight recessionary headwinds. But fed funds is already sitting at zero, which means there are only two ways the 10s-2s spread steepens materially. 1) The Fed cuts below 0% for the first time in history, dragging the 2-year yield down with it, or 2) The 10 year begins a disorderly acceleration higher on inflation concerns (we saw a small glimpse of this in the front half of the week).
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