Wall Street posted a rise of more than 15% in the 18-month period. (Credit : REUTERS)

Recession signal, Wall Street will rally?

Siti Fatimah Adri
Politics & Economic
International
Aug 16, 2019
1488
The sell-off with a very large intensity (sell-off) was engulfing the US stock market aka Wall Street in trading on Wednesday (08/14/2019). This sell-off was cause by movement in US bond market. In Wednesday's trade, yield on 2-year US bond had surpassed the 10-year US bond yield. This phenomenon is referred to as inversion. Inversion itself is a phenomenon where the short tenor bond yields are in a higher position than the long tenor.

In US bond market, inversion is crucial for world financial markets. Because inversion is a signal of recession in US. Recession is a very significant decline in economic activity that lasted for more than a few months, as reported by Investopedia. An economy can be said to be experiencing a recession if economic growth is negative for two consecutive quarters.

In today's trading, Dow Jones index collapsed 3.05% to 25479.42, marking the deepest percentage correction recorded by the index in 2019.

Meanwhile, S&P 500 index also fell 2.93% to 2,840.6 and Nasdaq Composite index dropped 3.02% to 7,773.94. These falls marked fourth deepest correction in history.

Interestingly, although many US stock exchanges have plummeted, Wall Street usually shows a good performance ahead of the recession. It even tends to move up.

Data from Credit Suisse shows that Wall Street usually posted an increase of up to 18 months after an inversion between 2 and 10-year tenor bonds. On average, Wall Street posted a rise of more than 15% in the 18-month period, to be exact 15.7%.

Although it was battered on Wednesday, yesterday (8/15/2019), Wall Street scored an appreciation the Dow Jones index rose 0.39% and S&P 500 index rose 0.25%. Only the Nasdaq Composite index weakened, but only thin at 0.09%.

Even though the issue was about to hold a rally, Wall Street rally after inversion of 2 and 10 year tenor bonds occurred will be determined by aggressiveness of The Fed in cutting its benchmark interest rate.

Source: https://www.cnbcindonesia.com/market/20190816130952-17-92507/setelah-ada-sinyal-resesi-benarkah-wall-street-akan-reli/2