March 30, 2022: -Wall Street may be overestimating recession risks. While investors focus on a scary inversion between the five-year and 30-year Treasury Note yields, Canaccord Genuity’s Tony Dwyer concentrates on optimistic activity in another part of the bond market.
According to Dwyer, the three-month versus five-year yield shows a healthier picture of the U.S. economy as it steepened.
“It measures the difference amid what a banker lending institution gets its money at, what they have to pay, versus what they charge or invested at,” the firm’s chief market strategist told CNBC. “We don’t look for a recession because that yield curve driving the lending is still very positive.”
Dwyer acknowledges the overall bond market reflected economic challenges but not enough to spark a recession.
“The fear is there. Asia seems to be a mess with more lockdowns. Europe is heading toward a recession, if not in one, because of the once in a generation ground war there,” he said. “The U.S. is being affected by higher rates. So, it certainly is slowing down.”
Dwyer expects the Federal Reserve to continue raising rates over the next few months. “There’s no question inflation is high. Rates are going higher,” Dwyer said. “The Fed is in a box. No matter the slowdown, they’ve got to raise rates.”
He sees stocks as a hedge against inflation and plans to buy around weakness. Based on historical trends during similar backdrops, Dwyer believes the S&P 500 will be significantly higher this time next year. But for now, investors may want to brace themselves for wild market swings.