Tag Archives: financial advisor

This Stock Market Rally Is Going To Fall Apart

roller coaster2My Comments: Another brick in the pile that says we’re headed for a market correction. A major clue is called the price to earnings ratio or P/E. It’s a readily available metric that helps understand relative valuations. The Shiller CAPE ratio is today recognized as the better measurement of market valuations. Currently, it is almost 63% higher that it’s historic mean. That comes back to a statistical law called reversion to the mean. What goes up also goes down.

Bob Bryan Aug. 4, 2016

A common refrain around the markets and economy is that expansions don’t die of old age. But that doesn’t mean they can’t still get a bit weary.

The recent run-up in stocks to an all-time high comes in the eighth year of the current bull market, making it the second-longest such market in history. Given the bull market’s “old age,” this recent upswing isn’t going to last very long, according to Jonathan Glionna at Barclays.

Glionna, head of US equity strategy research, argued in a note to clients on Wednesday that while the recent stock surge has come on the back of strong economic data, it is not enough to push the market higher over the long term.

The strategist came to this conclusion by analyzing three previous late-stage rallies since 1980 — 1988 to 1989, 1998 to 1999, and 2006 to 2007 — and identifying three conditions that are needed to make them sustainable. They are:
1. Increasing profit margins. Profit margins in each of the past three late-stage rallies hit new cycle highs in order to sustain the rally. This time around, margins have been on the decline since the third quarter of 2014, and even with a recent bounce in aggregate profits, a new cycle high seems unlikely.
2. Growing dividends. In each of the past three occurrences, dividends from S&P 500 companies have been increasing at a rapid pace. “Fast and accelerating dividend growth was present throughout each of the last three prolonged late-cycle rallies,” Glionna wrote. “But, dividend growth has begun to slow. We project a 6% increase in dividends for the S&P 500 in 2016. This is the lowest growth rate since 2010.” Additionally, forecasted growth for the next year is just 4.5%, showing a clear slowing pattern.
3. Increasing leverage. This one is happening, according to Glionna, but it may not have much more room to grow. “While this may be a sustainable amount given the easy conditions and low rates in high grade credit, the days of accelerating growth in borrowings are likely in the past, in our view,” Glionna wrote.

“This is because some important measures of debt sustainability, such as the ratio of debt-to-EBITDA are already elevated.” Essentially, companies are running out of room to borrow more.

Each of these three trends is a sign that companies could continue to grow more in the future. Since the stock market is essentially an investment on future expected growth and earnings, then higher profits, income from dividends, or growth through leverage would inspire investor confidence.

With each of these trending in the wrong direction, investors are less likely to assume that the future of a company is going to be brighter, which in turn means the stock price is less likely to increase. Thus, investors stay out of the market, and there goes the rally.

As we have mentioned before, it’s fair to point out that past cycles may not necessarily be predictive of the current one, and a lot has changed in the markets and economy since the financial crisis.

However, past occurrences are many times all we have to predict future events. And right now, the past isn’t saying anything good.

The source article can be found HERE.

Social Security Tips for Couples

My Comments: More ideas about the ongoing saga of when and how to best apply for Social Security benefits.

02/24/2016

There are many benefits to marriage, but one you may not yet have considered is the flexibility married couples enjoy when deciding how and when to claim Social Security. Even though the basic rules apply to everyone, a couple has more options than a single person because each member of a couple can claim at different dates, and may be eligible for spousal benefits.

Making the most of Social Security requires some strategy to take advantage of the basic benefit rules, however. After you reach age 62, for every year you postpone taking Social Security (up to age 70), you could receive up to 8% more in future monthly payments. (Once you reach age 70, increases stop, so there is no benefit to waiting past age 70.) Members of a couple may also have the option of claiming benefits based on their own work record, or 50% of their spouse’s benefit. For couples with big differences in earnings, claiming the spousal benefit may be better than claiming your own.

What’s more, Social Security payments are guaranteed for life and should generally adjust with inflation, thanks to cost-of-living increases. Because people are living longer these days, a higher stream of inflation-protected lifetime income can be very valuable.

But to take advantage of the higher monthly benefits, you may need to accept some short-term sacrifice. In other words, you’ll have less Social Security income in the first few years of retirement in order to get larger benefits later.

“As people live longer, the risk of outliving their savings in retirement is a big concern,” Ann Dowd, a CFP® professional and a vice president at Fidelity. “Maximizing Social Security is a key part of how couples can manage that risk.”

Until recently, many couples had additional options known as “file and suspend” and “claim now, claim more later” that are now being eliminated. Before you choose a strategy, be sure to review those options to see if you qualify.

In the absence of “file and suspend” and “claim now, claim more later” strategies, the big question is how long you expect to live. Deferring means a higher benefit, but it takes time to make up for all the payments you skipped in your 60s and to replace the savings you spent in the meantime. But when one spouse dies, the surviving spouse can claim the higher monthly benefit for the rest of his or her life. So, for a couple with at least one member who expects to live into his or her late 80s or 90s, deferring the higher earner’s benefit may make sense. If both members of a couple have serious health issues, claiming early may make more sense.

How likely are you to live to be 85, 90, or older? The answer may surprise you. Longevity has been steadily increasing, and surveys show that many people underestimate how long they will live. According to the Social Security Administration, a man turning 65 today will live to be 84.3 on average and a woman will live to be 86.6 on average. For a couple at age 65, the chances that one person will survive to age 85 are more than 75%.
CONTINUE-READING

Undeniable Evidence That The Real Economy Is Already In Recession Mode

roller coaster2My Comments: I have clients positioned in investments that gained in excess of 40% in 2008 and 2009. But they are upset because they lost money last year. Knowing that the bull market was long in the tooth, I made the argument that a defensive posture would bode well for their money and their future financial freedom. But despite what is obvious to me, some of them have elected to put their money somewhere else. I hope they don’t discover to their horror that expecting a magic wand from an investment manager is like expecting the tooth fairy to show up.

By Michael Snyder, on May 16th, 2016

You are about to see a chart that is undeniable evidence that we have already entered a major economic slowdown. In the “real economy”, stuff is bought and sold and shipped around the country by trucks, railroads and planes. When more stuff is being bought and sold and shipped around the country, the “real economy” is growing, and when less stuff is being bought and sold and shipped around the country, the “real economy” is shrinking. I know that might sound really basic, but I want everyone to be on the same page as we proceed in this article. Just because stock prices are artificially high right now does not mean that the U.S. economy is in good shape. In fact, there was a stock rally at this exact time of the year in 2008 even though the underlying economic fundamentals were rapidly deteriorating. We all remember what happened later that year, so we should not exactly be rejoicing that precisely the same pattern that we witnessed in 2008 is happening again right in front of our eyes.

During the month of April, the Cass Transportation Index was down 4.9 percent on a year over year basis. What this means is that a lot less stuff was bought and sold and shipped around the country in April 2016 when compared to April 2015. The following comes from Wolf Richter…

Freight shipments by truck and rail in the US fell 4.9% in April from the beaten-down levels of April 2015, according to the Cass Transportation Index, released on Friday. It was the worst April since 2010, which followed the worst March since 2010. In fact, shipment volume over the four months this year was the worst since 2010. This is no longer statistical “noise” that can easily be brushed off.

Of course this was not just a one month fluke. The reality is that we have now seen the Cass Shipping Index decline on a year over year basis for 14 consecutive months. Here is more commentary and a chart from Wolf Richter…

The Cass Freight Index is not seasonally adjusted. Hence the strong seasonal patterns in the chart. Note the beaten-down first four months of 2016 (red line):
Untitled

This is undeniable evidence that the “real economy” has been slowing down for more than a year. In 2007-2008 we saw a similar thing happen, but the Federal Reserve and most of the “experts” boldly assured us that there was not going to be a recession.

Of course then we immediately proceeded to plunge into the worst economic downturn since the Great Depression of the 1930s.

Traditionally, railroad activity has been a key indicator of where the U.S. economy is heading next. Just a few days ago, I wrote about how U.S. rail traffic was down more than 11 percent from a year ago during the month of April, and I included a photo that showed 292 Union Pacific engines sitting in the middle of the Arizona desert doing absolutely nothing.

Well, just yesterday one of my readers sent me a photograph of a news article from North Dakota about how a similar thing is happening up there. Hundreds of rail workers are being laid off, and engines are just sitting idle on the tracks because there is literally nothing for them to do…

Intuitively, does it seem like this should be happening in a “healthy” economy?  Of course not.

The reason why this is happening is because businesses have been selling less stuff. Total business sales have now been declining for almost two years, and they are now close to 15 percent lower than they were in late 2014.

Because sales are way down, unsold inventories are really starting to pile up. The inventory to sales ratio is now close to the level it was at during the worst moments of the last recession, and many analysts expect it to continue to keep going up.

Why can’t people understand what is happening? So far this year, job cut announcements are up 24 percent and the number of commercial bankruptcies is shooting through the roof. Signs that we are in the early chapters of a new economic downturn are all around us, and yet denial is everywhere.

For instance, just consider this excerpt from a CNBC article entitled “This key recession signal is broken“…

Treasury yields are behaving as if they are signaling a recession, but strategists say this time it’s more likely a sign of something else.

The market has been buzzing about the flattening yield curve, or the fact that yields on longer duration Treasurys are getting closer to yields on shorter duration securities.

In the case of 10-year notes and two-year notes, that spread was the flattest Friday than it has been on a closing basis since late 2007. The yield curve had turned negative in 2006 and stayed there for months in 2007 before turning higher ahead of the Great Recession. The spread was at 95 at Friday’s curve but widened Monday to more than 96.

Treasury yields are very, very clearly telling us that a new recession is here, but because the “experts” don’t want to believe it they are telling us that the signal is “broken”.

For many Americans, all that seems to matter is that the stock market has recovered from the horrible crashes last August and earlier this year. But in the end, I am convinced that those crashes will simply be regarded as “foreshocks” of a much greater crash in our not too distant future.

But if you don’t want to believe me, perhaps you will listen to Goldman Sachs. They just came out with six reasons why stocks are about to tumble.

Or perhaps you will believe Bank of America. They just came out with nine reasons why a big stock market decline is on the horizon.

To me, one of the big developments has been the fact that stock buybacks are really starting to dry up. In fact, announced stock buybacks have declined 38 percent so far this year…

After snapping up trillions of dollars of their own stock in a five-year shopping binge that dwarfed every other buyer, U.S. companies from Apple Inc. to IBM Corp. just put on the brakes. Announced repurchases dropped 38 percent to $244 billion in the last four months, the biggest decline since 2009, data compiled by Birinyi Associates and Bloomberg show. “If the only meaningful source of demand in the market is companies buying their own shares back, then what happens if that goes away?” asked Brad McMillan, CIO of Commonwealth “We should be concerned.”

Stock buybacks have been one of the key factors keeping stock prices at artificially inflated levels even though underlying economic conditions have been deteriorating. Now that stock buybacks are drying up, it is going to be difficult for stocks to stay disconnected from economic reality.

A lot of people have been asking me recently when the next crisis is going to arrive.

I always tell them that it is already here.

Just like in early 2008, economic conditions are rapidly deteriorating, but the stock market has not gotten the memo quite yet.

And just like in 2008, when the financial markets do finally start catching up with reality it will likely happen very quickly.

So don’t take your eyes off of the deteriorating economic fundamentals, because it is inevitable that the financial markets will follow eventually.

What You Should Know About the New Social Security Rules

SSA-image-3My Comments: If you have not yet signed up to receive your Social Security benefits, you would be well served to better understand the rules associated with Social Security. Believe me, it’s confusing to experts like me, much less someone with an aversion to thinking about money. Here’s a start to your journey.

Kristin Wong, June 1, 2016

Social Security is already a hot-button issue, and recent changes have people really freaking out about it, which makes it tough to get past the outrage and just navigate the facts. Here’s what you should know about the changes.

If you’re not familiar with how Social Security works, it’s okay—the program is complicated and frequently misunderstood, but the basics of taking benefits are simple to follow. Last year, the government signed the Bipartisan Budget Act into law, and the bill included some changes to the rules for collecting Social Security benefits. Those changes recently went into effect, and they axed some smart strategies that helped people maximize their benefits.

What’s Changed

If you retire after your full retirement age, you usually get 8 percent more until age 70. In other words, the longer you wait, the higher your payment. The SSA refers to this as delayed retirement credits. Up until recently, married couples used a couple of “loopholes” in the rules to get even more out of these delayed credits. The new changes closed the loopholes and eliminate these strategies.

You Can No Longer “File and Suspend” to Activate Benefits for a Spouse

Known as the “file and suspend” strategy, the loophole allowed married couples to delay one spouse’s benefit while the other spouse received a payout on that same benefit. It’s a little confusing, I know, but here’s how it worked in practice.

Basically, one spouse (usually the one who earned more money) would file for Social Security once they reached their full retirement age. Once they filed, Spouse #2 would then file for a spousal benefit, usually half of the full benefit. Spouse #1 would then suspend the benefit, postponing their own payout and letting their benefit grow 8% every year.

In other words, they file, take the spousal benefit, then suspend. Meanwhile, Spouse #2 gets a check every month, but the main benefit earns interest. You get the best of both worlds.

With the new rules, which took effect May 1st, this is no longer an option for most of us. According to the SSA:
… if you take your retirement benefit and then ask (on or after April 30, 2016) to suspend it to earn delayed retirement credits, your spouse or dependents generally won’t be able to receive benefits on your Social Security record during the suspension. You also won’t be able to receive spouse benefits on anyone else’s record during that time.

When you suspend benefits, you can no longer receive spousal benefits. The new rules don’t apply to people born before April 30, 1950, however. This gives recent retirees a chance to take advantage of the strategy they may have been counting on for income.

No More “Restricted Applications” to Collect Benefits While Sitting On Future Payouts

Along with “file and suspend,” some used a strategy called “restricted applications” to optimize their benefits. Going back to the previous example, this allowed Spouse #2 to receive spousal benefits while delaying their own Social Security benefits, which are separate. This way, both spouses could enjoy the annual 8% increase and still get paid every month.

Not anymore, though. The new rule, which applies to anyone born after 1954, eliminates restricted applications and forces you to take both benefits at the same time. Here’s how the Social Security Administration puts it:
if you are eligible for benefits both as a retiree and as a spouse (or divorced spouse), you must start both benefits at the same time. This “deemed filing” used to apply only before the full retirement age, which is currently 66. Now it applies at any age up to 70, if you turned 62 after January 1, 2016.

So if you apply for one benefit, whether it’s a spousal benefit or your own Social Security payout, you apply for both. Sounds fair enough, but here’s the kicker: you basically only get the higher benefit. The Motley Fool explains:
…that person won’t have the option to collect spousal benefits if his or her own benefit amount is higher. That person will therefore be left with a choice: Start taking benefits and lose out on the 8% annual increase for delaying, or hold off on taking benefits to capitalize on those delayed retirement credits and forego Social Security income in the interim.

That’s not exactly how the SSA puts it, but that’s the gist of what happens and why so many people are up in arms about the changes. Couples could lose out on hundreds or even thousands of dollars every month.

Even though the “Social Security Crisis” is overblown, it’s probably fair to assume that the rules are meant to maintain Social Security funds.

What Hasn’t Changed

People have strong opinions about Social Security. Many of the articles covering the changes seem to imply there’s been a huge overhaul that eliminates basic perks. This isn’t the case—spousal benefits and suspended benefits haven’t been eliminated or even reduced. However, the rules have changed to close some the loopholes that allowed people to really take advantage of those perks. Those changes could make a big difference for a lot of retirees (or soon-to-be retirees).

The most important takeaway, though, is that delayed retirement credits still exist. You still get an annual increase if you delay your Social Security benefits past your full retirement age. And this perk is the backbone for most Social Security withdrawal strategies. In other words, it’s still possible to strategize your benefits and get more out of them.

Your own approach to collecting Social Security depends on your own situation: how much you earn in retirement, when you plan to stop working, how much your living expenses are and so on. The Motley Fool suggests one common strategy, though:
If you want to take advantage of those delayed retirement credits but can’t wait that long to start receiving Social Security income, assuming both spouses worked, you could have one spouse (ideally, the higher wage earner) hold off on taking benefits while the other claims them earlier. This way, you get some income when you need it while allowing the higher wage earner’s benefits to grow.

The SSA also has a handful of calculators that can help you get an idea of what your own benefit amount will be, depending on when you take it and how much you earn.

Don’t Expect To Make Any Money In The Market For The Next 7 Years

InvestMy Comments: I have no idea whether this will prove to be true or not. But it sure enters my thinking whenever I talk about money with clients and how they are going to pay their future bills. And how I’m going to pay my bills.

John Mauldin,  Economics,  Jul. 28, 2016

The next recession is coming, and it will be severe.

My friend Ed Easterling of Crestmont Research just updated his Economic Cycle Dashboard and sent me a personal email with some of his thoughts.

The current expansion is the fourth longest since 1954… but also the weakest. Since 1950, average annual GDP growth in recovery periods has been 4.3%.

This time, average GDP growth has been only 2.1% for the seven years following the Great Recession. That means the economy has grown a mere 16% during this so-called “recovery.”

If this were an average recovery, total GDP growth would have been 34% by now… instead of 16%. So, it’s no wonder that wage growth, job creation, household income, and all kinds of other stats look so meager.

I think the next recovery will be even weaker than this one (the weakest in the last 60 years) because monetary policy is hindering growth.

Now, combine a weak recovery with Negative Interest Rate Policy or NIRP. Asset prices are a reflection of interest rates and economic growth. And both are just slightly above or below zero. So, how can we really expect stocks, commodities, and other assets to gain value?

The upshot is that traditional investment strategies will stop working soon. Ask European pension income recipients about their fears.

Welcome to 0% returns for the next 7 years

All bets may be off if the latest long-term return forecasts are correct. Here’s a chart from my friends at GMO showing the latest 7-year asset class forecast.


See that dotted line, the one that not a single asset class gets anywhere near? That’s the 6.5% long-term stock return that many supposedly wise investors tell us is reasonable to expect.

GMO doesn’t think it’s reasonable at all, at least not for the next seven years.

If GMO is right—and they usually are—and you’re a devotee of passive or semi-passive asset allocation strategy, you can expect somewhere around 0% returns over the next seven years… if you’re lucky.

See that nearly invisible -0.2% yellow bar for “U.S. Cash?” It’s not your eyes. Welcome to NIRP, American-style.

The Fed’s fantasies notwithstanding, NIRP is not conducive to “normal” returns in any asset class. GMO says the best bets are emerging-market stocks and timber.

Those also happen to be thin markets. Not everyone can hold them at once.

Prepare to be stuck.

Why low-volatility ETFs are now a high-stakes gamble

roller coaster2My Comments: I don’t normally post anything on this site on weekends. But there is so much going on these days that I either have to start posting twice a day during the week or from time to time on the weekend.

ETF’s are as significant a step in the evolution of money management as were mutual funds in the early part of the 20th Century. I’m increasingly using them when it comes to my money and to that of my clients. For those of you that find all this mind numbing, please feel free to ignore it. (My source article is found HERE.)

By John Prestbo July 27, 2016

Wall Street is doing a booming business with investors who want to avoid the jitters brought on by a rocky stock market. So booming, in fact, that the performance and purpose of low-volatility investments now pose the very risks they were meant to avoid.

More than $50 billion has poured into low-volatility indexed exchange-traded funds over the past five years or so, in the wake of the 2008-09 market meltdown. There are now 14 “lo-vol” ETFs with assets exceeding $100 million each, and many more with less. Whenever the market hits a pothole, these ETFs enjoy a bump-up in assets.

Six ETFs in the lo-vol space have attracted more than $2 billion of assets apiece. The oldest fund is PowerShares S&P 500 Low Volatility Portfolio SPLV, +0.12% which began trading in May 2011 and now lays claim to almost 20% of lo-vol assets.

Yet the second-oldest lo-vol ETF is actually almost twice as large. The iShares Edge MSCI Minimum Volatility USA ETF USMV, +0.21% dominates the group, with close to 40% of the assets. One reason may be that it has the lowest management fee among the top six. Its success, in fact, spawned an iShares family of lo-vol ETFs with the “Edge” brand.

These ETFs mostly live up to their billing. Most of them achieve low volatility by holding those stocks in an index that fluctuate less than the overall index. Some newer models contrive triggers to move out of stocks and into cash when the market slumps, and to move back into stocks when the slump ends.

Whatever the methodology, lo-vol ETFs aim to be a sleep-better substitute for the broad-market indexes from which they are derived. They decline less in downturns, but tend not to rise as much in rallies — or take longer to get to the same place. Investors tend to overlook the “hidden” cost of this upside gap.

On its website, iShares says its minimum volatility USA ETF historically captured 83% of a broad index’s up months and 44% of the down months. Curiously, iShares uses the S&P 500 SPX, +0.16% rather than the MSCI USA index to calculate these statistics. By contrast, PowerShares declares on its website that its lo-vol ETF delivered 77% “up-capture” and 43% “down-capture” since inception.

That means, for a $10,000 investment and a base index that rises 10%, the iShares ETF would leave $170 on the table from a potential $1,000 gain and the PowerShares ETF would leave $230. Those amounts may look like hotel-room rates, but the upside shortfalls accumulate over time.

In other words, the longer you want to sleep well, the more expensive it could get in terms of foregone capital appreciation.

This year’s market potholes so far — the year-opening tumble and the surprise Brexit vote — are not good illustrations of how lo-vol vehicles are supposed to work. These ETFs did fall much less than the base indexes in both cases, though the “downside capture” was larger than average.

But both of these ETFs bounced back more quickly and strongly than the base indexes. Indeed, these lo-vol ETFs are more than doubly outperforming their base indexes this year through July 22.

This upside-down situation is the result of all the assets pouring into these lo-vol ETFs. The iShares fund is the third-largest asset-gathering ETF this year, according to ETF.com — and as always, money coming in pushes prices up. Another result: The lo-vol ETFs this year are roughly 25% more volatile than the market.

These conditions won’t last. Reversion to the mean could disillusion investors already holding lo-vol vehicles. And for those thinking about adding lo-vol to their portfolios this state of affairs is a red-light warning that now probably isn’t the best time to get in.

Whether any time is right for lo-vol is a personal decision because it touches on fear about loss. If every little market swoon pumps up your blood pressure, lo-vol may be the answer. But be aware of the costs and consequences.

John Prestbo is retired as editor and executive director of Dow Jones Indexes, now part of S&P Dow Jones Indices, in which Dow Jones & Co., publisher of MarketWatch, holds a small interest. Prestbo also is an adviser to MarketGrader Capital, which scores stocks on the basis of fundamental factors and chooses components of the Barron’s 400 Index.

Why Interest Rates Are Lower Than Ever

Piggy Bank 1My Comments: Please keep reading…

Paul J. Lim,  July 6, 2016

If you think the financial panic over Brexit is over — because stocks have bounced back somewhat from their initial sell off — think again.

As scared investors continue to seek shelter in boring government bonds, fixed income prices have soared while yields on 10-year Treasury securities plummeted to as low as 1.34%, marking the lowest levels ever seen in U.S. history.

In early morning trading Wednesday, yields bounced slightly to 1.37%. But that’s a far cry from the 5% yields on 10-year Treasuries before the global financial crisis.

Overseas, the situation has gotten even worse: 10-year German and Japanese bonds have sunk further into negative yield territory, which means investors are so concerned about the economy that they’re willing to pay officials for the right to park their money with the government.
Aren’t record low rates a good thing?

Normally, investors crave low interest rates because cheap borrowing costs encourage spending and capital investments, which fuel economic activity and growth. Low rates also offer relief for debt-laden governments and consumers, who can now refinance existing loans at better terms.
But ultra-low interest rates can also be a sign that investors are so worried about stagnation or recession that their primary focus is on the safe return of their capital—that is, making sure they can simply get it back—not earning big returns on their capital.

The uncertainty caused by Britain’s unprecedented move to leave the European Union has fueled fear over what’s to come for the global economy. And in times of fear, investors generally flock to bonds, which drives up their prices and drives down their yields. (Market interest rates move in the opposite direction of bond prices.)

Less than two weeks after the vote, economists have already been ratcheting down their expectations for growth overseas. IHS Global Insight, for instance, now believes the gross domestic product among countries in the Eurozone will grow just 1.4% this year and 0.9% next year. Before Brexit, the economic research firm had been forecasting Euroepean economic growth of 1.7% this year and 1.8% in 2017.

How scared should you be?

It’s far too soon to tell if the U.S. is also headed for negative rates. But one thing is clear: The so-called “yield curve” is flattening out. And that normally spells trouble for the economy.

The yield curve refers to the spectrum of rates paid by Treasuries of various maturities. Normally, longer-dated Treasuries — such as 10- or 30-year bonds that require investors to tie up their money for extended periods of time — pay substantially more than short-term debt, which poses less risk.

Yet when fear over the economy bubbles over, investors tend to flock into long-term bonds, driving down long-term yields. And when that happens, the gap between what short- and long-term bonds are paying decreases and the yield curve “flattens.”

Ed Yardeni, president and chief investment officer at Yardeni Research, points out that the spread between yields on 10-year and two-year Treasuries is the flattest it has been since November 14, 2007. Indeed, the spread between 10-year and two-year yields is down to just 0.8 percentage points. A year earlier, it was roughly double that.

Why is this important? Because Nov. 14, 2007 was just two weeks before the start of the 2007-2009 recession that coincided with the global financial crisis.

If the yield curve actually inverts — meaning 10-year Treasuries start paying less than two-year Treasuries — it’s virtually certain that the economy is in or headed for recession.

If the economy is so scary, why are stocks doing reasonably well?

That’s a good question. IHS Global Insight economist Patrick Newport points out that “the seemingly contradictory demand for stocks given the rally in bonds is likely driven by the perception that the Federal Reserve will further delay raising rates in the wake of the Brexit vote, making stocks more attractive in terms of returns.”

Income-oriented investors, who’ve been frustrated by the paltry yields being paid by bonds, may also be driving this trend.

Back in the early 1980s 10-year Treasuries were yielding 10 percentage points more than the dividend yield on blue chip U.S. stocks, notes Jack Ablin, chief investment officer at BMO Private Bank. “Nowadays that gap has disappeared and then some,” he said. Indeed, today, the dividend yield on the S&P 500—what you get for holding the stocks above and beyond stock price appreciation—is more than half a percentage point higher than what 10-year Treasuries are paying.

This trend could persist and stocks could keep rising for months on the strength of income investors. The problem is, if the bond market is right and the economy is this weak, eventually the stock market will get the message too.

My delayed comment: there is a sizeable number of people in this country who are convinced we are in the ‘end of days’ scenario which I think is patently stupid. But constant talk about this assumed chaos can be a self-fulfilling prophecy when leadership elements keep pushing and pushing. But it makes no sense economically.