(Business Insider) The three most dangerous words on Wall Street keep popping up.
The 10-year yield has now traded below the 3-month yield for three weeks, flashing a long-watched historical sign that a recession is looming. On Tuesday, the spread fell to a low of -14.26 basis points, its most negative since August 2007. This is the first time an inversion has happened for such a long period since before the financial crisis.
Still, consensus among equity strategists is that there is no cause for alarm, shrugging off the inversion of the yield curve, which has typically been a signal that a recession is ahead. In the last month, three bullish strategists raised their price targets.
The message seems to be that this yield curve inversion is different from previous episodes. When the 3-month and 10-year yield curve last inverted in March, for example, it was dismissed by many. Tom Porcelli, chief economist at RBC, said an inversion in March for example did not follow the historical pattern that would signal a recession.
"'Different this time,' the three most dangerous words in the financial lexicon," wrote Michael Darda, chief economist and market strategist at MKM Partners in a note out Tuesday.
While bond investors have been bearish on the economy, equity investors have been bullish, sometimes pointing to other economic factors or the impact of quantitative easing, when a central bank adds to the money supply, as reasons the inversion shouldn't be seriously watched.
Trade war tensions
The yield-curve inversion has grown more pronounced amidst increasing tension around the China trade war. There is worry about global growth, and macro data is showing signs of a weakening global economy.
Darda argues that the economy is slowing, and that the Fed needs to take careful action to keep it on an even keel. That may mean cutting rates, if economic momentum continues to slow and the outcome of the US-China trade war is a negative one.
And while the trade war has certainly had an impact on yields, it is not the only worry according to Morgan Stanley. "Economic data around the world have come in weaker than expected, led by Europe and Asia, including China," a team of strategists at Morgan Stanley led by Mike Wilson wrote in a May 28 note.
The latest round of economic releases showed disappointing numbers in April, before trade tensions re-escalated in May, the strategists said. And weak earnings numbers in the first quarter of 2019 show that companies are lowering their expectations about year-long growth.
