The stock market rallied on Friday again as most of the Wednesday weakness has been reversed. It’s possible that the issuance of a special prosecutor to look into the Russian interference in the 2016 presidential election calmed the markets down. It’s also possible that the market was simply due for some volatility and finally got it. After that volatility came, dip buyers stepped in once again. Friday the S&P 500 was up 0.68% and the VIX was down 17.87%. The stock market can’t even fall 2% without dip buyers swooping in. The spurt of volatility actually turned into a bullish catalyst because investors are desperate to get into the market on any correction since there hasn’t been a 2% daily drop in the S&P 500 all year and there hasn’t been a 5% correction in almost a year. Dip buyers have been rewarded every time in this bull cycle, so they will not be deterred by excessive valuations.
While the stock market ignored the latest weakness in C&I lending seen in the chart below, the bond market is paying closer attention. Since May 10th, the 10-year bond has fallen from 2.41% to 2.23%. As you can see, the deceleration in C&I lending led to growth slowing to the weakest rate since April 2011. It has been falling since January 2015. In the prior cycles, year over year growth went negative after the recession which indicates that the economy is likely near another recession.
The difference between the two-year bond and the ten-year bond is indicative of where the fixed income market is predicting the economy is going. As you can see, the flattening yield curve shows the bond market is watching the C&I lending stats closely. The yield curve isn’t inverted yet which indicates a recession isn’t as imminent as the C&I lending growth rate would indicate. It’s rare for all the indicators to line up perfectly. By the time they all are flashing a recession, the economy is already in one and the market has fallen. That’s why it’s important to watch now as the bull market rages on.
