Investors may be ahead of themselves if they’re expecting an economic V-shaped recovery, according to one top strategist.
“We’ve got this epic battle between monetary and fiscal policy on one side, and weak economic earnings, earnings data on the other,” Tony Dwyer, managing director and chief market strategist at Canaccord Genuity, told Yahoo Finance.
Dwyer says looking at the yield curve spread between the 2-year and 10-year US Treasury (^TNX) can be an indicator not only of when the economy goes into a recession, but when it’s expected to come out of one.
“Having a very, very flat yield curve is telling you that the economy is going to be very slow coming out of the recession and that you want to maybe just kind of wait for some of the overbought condition that was created on this relief rally to work itself out,” he added.
Dwyer notes the markets went from a “panic mode” in March into the recent relief rally and are now in a “frustration phase” where investors don’t know which way to go.
“You’re well off the low so you can’t identify, ‘wow, we’re that oversold anymore,’ said Dwyer. “But it’s too early to expect this major economic recovery, and you get a lot of back and forth.”
Dwyer notes the markets haven’t moved much since April 9 when the Federal Reserve announced a $2.3 trillion plan to help Main Street businesses and local governments including the purchases of high-yield bonds.
“We have to be careful feeling this fear of missing out because over the last few weeks since that Fed decision, you haven’t really missed anything,” says Dwyer.
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The Federal Reserve is ‘so not out of bullets’
Dwyer says the Federal Reserve is by no means out of ammunition to continue helping the economy.
“As long as the U.S. is a primary currency, we can print as much money as we want,” said Dwyer. “I’m not saying whether that’s good or bad.”
Dwyer says the Federal Reserve’s April 9 decision was a “game-changer” showing it will attack any area of the economy where it sees any level of stress.
“They are so not out of bullets,” said Dwyer. “Since I’ve heard people say the Fed is out of bullets, they’ve come in with bazooka after bazooka after bazooka.”
Ines covers the US stock market from the floor of the New York Exchange. Follow her on Twitter at @inesreports.
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