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Portfolio > Economy & Markets > Stocks

Will the Stock Selloff Continue? Watch These 3 Indicators

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Does the recent selloff in U.S. stocks and even larger selloffs in international equities, including emerging markets, suggest that the current bull market is near a tipping point, about to reverse itself?

Nicholas Colas, co-founder of DataTrek Research, writes that last week’s global selloff “is worrying,” but not definitive.

Indeed on Monday stocks ended the session mixed, with the Dow up slightly and the S&P 500 and Nasdaq posting slight losses.

Colas is looking at these capital markets for signs of what might come next for stocks:

1.The U.S. dollar. “Further dollar strength is our #1 worry, as it would cut into 2019 earnings estimates for large-cap, multinational US companies,” writes Colas, noting that higher yields haven’t yet lifted the dollar to new highs.

The dollar index (DXY) ended Monday at 95.77, below the index’s 2018 high of 96.73, posted on Aug. 14 when 10-year Treasury yields were at 2.9%, below today’s 3.23%.

2. Corporate bond yield spreads. “If higher yields are really set to choke off U.S. economic/earnings growth in 2019, you’d expect to see fixed income investors reset corporate spreads higher to price in that risk.”

Although U.S. high-yield spreads widened last week to 331 basis points from 322 the week before, investment-grade corporate spreads were unchanged at 143 basis points — well below the 163-point spread set in early July. (U.S. bond markets were closed Monday.)

3. Spread between Treasury inflation-protected securities (TIPS) and nominal U.S. government bonds with a similar maturity, known as the TIPS breakeven. “If U.S. inflation is really at the cusp of a breakout, TIPS spreads would have blown out last week. They didn’t,” writes Colas.

He doesn’t doubt that the selloff in Treasuries will continue to pressure stocks as yields rise but notes that currently “there is just not enough evidence yet to trigger our ‘intellectual stop loss.’ “

— Check out Howard Marks: ‘Time to Take Some Risk Off the Table’ on ThinkAdvisor.


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