Global market-cap has risen $6.38 trillion to reach $76 trillion in 2019.
Bonds and stocks now yield very different returns in the world’s richest countries, and the divergence may well be pointing to a likely global recession that would rout equities. A full-blown recession in the West now has a one-third probability, the likelihood rising about five times in just more than a year, even as the spread in returns on stocks and bonds widens to unsustainable levels. That would mean an imminent equities crash — unless earnings improve, increase investor appetite for risk assets, and hold down stock dividend yields.
About $16-trillion of global bonds now yield negative returns. Barring the US and the UK, 10-year bonds in Europe’s richer neighbourhoods and Japan are offering negative returns.
On the surface, equities remained rather healthy, particularly on either side of the Atlantic. Spreads between the 10-year yield and stock dividend yield are among the lowest in the US and the UK, the only two major economies where 10-year bonds still yield positive returns. By contrast, the spreads in other European countries and Japan are as wide as 4.5%, with Sweden showing the greatest divergence. Unless company earnings improved and some money moved back to equities from bonds, stocks could face a rout — particularly in the developed economies where growth is rather hard to achieve.
Global market-cap has risen $6.38 trillion to reach $76 trillion in 2019. To be sure, ultra-loose monetary policies mean that global equity assets could continue to get a share of the cash meant otherwise for immediate consumption, and those inflows could help offset a total rout of equities if a full-blown recession were to hit the developed world.
In the US, the spread between three-month and 10-year bond yields has become negative since late May 2019. Yield inversion is often viewed as an indicator of an imminent recession. The New York Fed is now assigning a 31% probability to the likelihood of a recession in the next 12 months.
