The yield curve has been inverted for long enough for investors to get used to its presence without worrying about its historical implications. But just when it seemed that a 10-year Treasury yield trading below Fed funds was irrelevant, along comes former Fed Chairman Alan Greenspan to suggest otherwise.
“When you get this far away from a recession invariably forces build up for the next recession, and indeed we are beginning to see that sign,” Greenspan told a business conference today. “For example in the U.S., profit margins … have begun to stabilize, which is an early sign we are in the later stages of a cycle,” he said via The International Herald Tribune. “While, yes, it is possible we can get a recession in the latter months of 2007, most forecasters are not making that judgment and indeed are projecting forward into 2008 … with some slowdown.”
The maestro’s comments today come in the wake of his observations last fall, when he advised that the worst of the housing correction was behind us. Not long after, various commentators began saying that the economy looked stronger than expected. And in fact, the fourth-quarter GDP report was surprisingly strong, suggesting that growth would continue to dominate.
It’s debatable how much sway Greenspan retains over popular imagination on economic thinking, but perhaps we’ll find out this week. By our reckoning, the stock market’s looking for an excuse for a correction, and Alan’s opining is as good as any.
The S&P 500, to cite the obvious benchmark, has been on a roll for some time and perhaps it’s significant that it’s closing in on its old high set back in March 2000. Mr. Market has a nasty habit of retracing old bull markets only to stumble at the 11th hour. We have no doubt that the S&P will one day ascend to greater levels, but we’re not so sure a new record will come by the seventh anniversary of its old zenith.