Watching Bonds Is the Easiest Way to Predict the Next U.S. Stock Market Crash

Consider bonds. They’re worth keeping under scrutiny now because they are signaling some inherent market weaknesses. Bonds are telling the big story when it comes to the next—make that the imminent—stock market crash.

The jolt that the stock exchanges have experienced between the end of last January and the start of February may turn out to be a mere appetizer. Stocks on Wall Street could reserve some major, heavy, greasy courses for investors to confront. This is no celebrity chef event. There are some key indicators that point toward a deeper correction or, worse, a major stock market crash. (Source: “U.S. Stocks Fall With Treasuries, Dollar Climbs: Markets Wrap,” CNBC, February 20, 2018.)

The key to the market downfall is that bond yields are going up and bond prices are going down. That tells the relevant economic authorities—like the Federal Reserve—to prepare for higher inflation. Now, it seems investors better prepare because the much-talked-about higher interest rates are coming; as many as three in 2018 alone. But in 2019, the pace of rate hikes could increase.

Treasury yields are moving higher. They do so when those in charge of such things notice that consumer prices are increasing. Inflation is now approaching three percent. Normally, inflation going up pushes gold prices higher and stock prices lower. For the time being, stocks are stable or slightly higher. But it won’t be long before the higher rates will become official. The next Federal Reserve decision is scheduled for March 21. It’s going to be Jerome Powell’s first. Trump chose him because he had a reputation for not favoring stability.

The Fed Has Few Tools Against Inflation

But, as everything suggests that inflation is going higher, there’s little Powell can do. The 0.25% hike is a sure thing. A 0.50% hike cannot be excluded because the U.S. dollar, despite the confused miscommunication between Treasury secretary Steven Mnuchin and President Trump—who can’t seem to agree whether they want a strong or a weak greenback—is slipping against all major currencies. For example, the European Central Bank continues to practice quantitative easing (QE). Therefore, the EURUSD exchange rate is still artificial.