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Hanging Curve

Eric Parnell, CFA profile picture
Eric Parnell, CFA


  • Economic growth is accelerating, inflation is increasing, and bond yields are on the rise!
  • What if something entirely different is actually unfolding?
  • What does the hanging curve tell us about what we should reasonably expect going forward?

It is a message we keep hearing about in the mainstream financial media today. Bonds yields are on the rise. The optimists attribute the increase to a budding phase of accelerating economic growth and the higher inflation that comes with it. The more skeptical among us believe that an inevitable outbreak of higher inflation will induce the Fed to tighten more quickly than currently expected. Despite their differing views, both leading narratives rely on the key underlying premise that inflation is going higher. But what about a third outcome? What if higher inflation never comes to pass? And what if this takes place at the same time that the economy sputters while the Fed is still raising rates? What then?

Scoffs Of Derision

Dare raising the possibility of this third outcome in the mainstream financial media. I can hear now the haughty scoffs and see scornful glances of derision being cast upon the market heretic for even raising such a possibility. But here's the thing. Every single year since the calming of the financial crisis we have heard the same exact themes being uttered. Economic growth is accelerating! Higher inflation is right around the corner! Yet every single year to date through today, such an outcome has never come to pass. So forgive my cynicism, but given that this narrative has been largely wrong the last eight years and counting, why exactly is it absurd to think it might happen for a ninth time in a row? Just sayin'.

But 2018 is different! We are now in a phase of synchronized global economic growth. And we just had the passage of a massive tax cut program that is propelling corporate earnings projections to new all-time highs. It is only a matter of time now before corporations pass along this bounty to its workers

This article was written by

Eric Parnell, CFA profile picture
Chief Market Strategist, Great Valley Advisor Group and Assistant Professor of Business and Economics, Ursinus College

Analyst’s Disclosure: I am/we are long RSP, SPLV, TLT, TIP. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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Comments (107)

Not bad Eric. I check it weekly, and I liquidate everything but risk-free (-ish) when it flattens or inverts. Right now it’s as close to flat as I’ve seen it in years.
I like your article. Unfortunately for me I have a more pessimistic view of the world and U.S. economy. Take the premise that the FOMC has been trying to stimulate the economy ever since 2008, and they are afraid to normalize. See SOMA account balances at Federal Reserve Bank of New York. The current balance is only $52 billion lower than it was September 27, 2017. That is a very slow pace to normalization,($10 B per month). when they were purchasing at a rate of $85 Billion a month. What are they so frightened about when the markets are at all time highs? I'll tell you and it has to do with the big D word alluded to in comments above. If you look at the U.S population growth from the 2000 census to 2010, it was about 9%. That is about 1.25% compounded annually over ten years. When all your economic models include inflation from the past 100 or more have inflation running above 3% due to population increases of above or near that long term run, and you see the economic crisis of 2007 to 2009, you get spooked. You look at Japan over the past now 30 years and get even more spooked. No population growth means Deflation. It is going to happen and when it does lots of people are going to get hurt. The Central bankers of the world (developed) are watching this and haven't been able to sleep at night for some time.

Good luck with everything in the future.
k-ski profile picture
which do you feel is more important for being long TLT

1)the lower inflation risk OR
2) the possibility of ECB & BOJ starting QT and pushing up their yields (finally) moving foreign $ away from US treasuries and into those
baroquenhorse profile picture
I love your metaphors. Nice writing Mr. Parnell.
henryc profile picture
curve is a distant relative of the knuckle ball. that's where analysis is needed. unknowable performance - past or present. keep trying. thanks. hank
A thought provoking article. Thanks for the insights.
I’m never one to ask many questions
I do like your idea and angles and different types of thoughts, however at the end of this article you state long positions on widely held security s
My question is important
If market is showing thus hanging curve then what formula should personal investors use for stop price? When and if the market overreacts to some issue? What is your fallback position? What stop price plan? What profits locking plan?
There must be follow up discussions on this important aspect of your article
JOE STERN profile picture
Thanks for the great article, Eric. I consider the yield curve to be the most reliable leading indicator but it is underreported because it is not a single number. Thus the talking heads cannot just say it went up or down 0.2 % and this is a good thing or a bad thing. In your next article on the subject you might want to show a chart with the difference between the 10yr rate and the 2yr rate plotted with GDP and the S&P 500 or DJIA. Don't lag anything on the chart, just let us see the patterns and how they relate. Thanks again.
Eric Parnell, CFA profile picture
Hi Joe,

Thanks for your comment and your great points about the yield curve and its coverage in the financial media. Also, great idea on the chart that you have mentioned - I will look to include it in an upcoming article.

Thanks again!
Gas Money. profile picture
Great article man, it gets difficult to maintain focus at times, especially with what has been going on the past few weeks... great to take in your thoughts and reflect on what I've been doing right and wrong with my trading this year...
Eric Parnell, CFA profile picture
Hello Gas Money - Thanks for your comment. I appreciate it and I'm glad that you found the article useful. Thanks again!
There is a certain problem with the picture representing a hanging curve. A hanging curve is almost always in the upper portion of the strike zone, or higher, although in the picture the pitch is solidly in the middle of the plate. Left handed batters are notorious for being low ball hitters, so it may have been more representative as an illustration with a left handed batter with the pitch being a very low strike. It is possible that the pitch could still be hanging but low in the strike zone, sort of an oxymoron, and probably the result of a ball that eluded proper grip or arm motion.
This is big league commentary on hanging curves, not bigly.
'Neither did the sustainably higher inflation expected by so many despite the fact that central banks were relentlessly pumping monetary stimulus'
We are all aware of what happened in regard to a lack of real economic growth, with instead asset appreciation being the most notable product of CB liquidity.
It is fascinating that the very premise of intention, and why it did not work as planned, is never really addressed. Sure, there are some theories thrown about such as secular stagnation, but the PHD academics who have been steeped in this thought for a lifetime can't really explain what happened.
What is fascinating is that the question is never sufficiently addressed. In many ways the question is confounding to conventional thought, more so to actual conventional knowledge. It is a very important question, not simply because of the past, but directed at the future as well.
Good thinking Fracjob, the rich cannot engage with the needs of people as they are too busy looking after wealth. Instead of tax breaks a means of taking more from global tech firms is needed to pay the welfare bill.
Power has shifted to the FANGs and the people vegetate in increasingly meaningless organization of countries as politicians scrap about- disconnected from the process of wealth creation as they are no longer in control and the people are left with jobs in a failing system or nothing.
Eric Parnell, CFA profile picture
Hello Fracjob,

Thanks for your comment and you raise a very good point worth discussion.

From my perspective, the reason relentless central bank stimulus has not resulted in sustainably higher inflation has been the result of forces that caused me to be against the approach for trying to generate economic growth beyond rescuing the global economy from the abyss (in other words, I think QE1 had good merit, but all of the programs that have come since the summer of 2010 have been badly misguided). Pinning interest rates at zero and engaging in massive liquidity injections leads to the effect of those that have access to this capital increasing leverage in order to engage in what amounts to financial engineering activity. For example, what incentive does a company have to assume the business and financial risk of accessing low cost debt capital to engage in a capital spending project that may or may not increase EPS and potentially disappoint their shareholders when they can use this low cost debt instead to engage in share buyback activity, carefully manage their EPS targets with greater probability and more easily satisfy shareholder expectations. By favoring buybacks over capex, workers are not hired, wages are not increased, scarce resources are not consumed, and instead capital is allocated to unproductive resources with gains going to the wealthiest among us that are least likely to spend this marginal increase in net worth and instead are inclined to hoard it. Until corporations are much more motivated from a competitive and profitability standpoint to put capital to work in a measurable and productive way, they are understandably more likely to opt for the easier choice in share buybacks. And it is not until the cost of engaging in share repurchases starts to exceed the benefits that we are likely to see any sustained economic growth or inflationary pressures, particularly given the excess capacity that continues to exist in many parts of the globe.

So from my perspective, I have not been surprised that keeping interest rates low and capital flowing has not resulted in inflationary pressures to date throughout the post crisis period. For Japan long before the outbreak of the financial crisis already demonstrated why such an approach simply does not work this way in any sustainable way.

Great question to raise. Thanks again!
easyrob profile picture
Clear and well constructed reply regarding the reasons for and consequences of, QE for the sake of mkts as opposed to the economy. Thanks!
Chart Rider profile picture
Tax cuts don't 'create earnings.' Tax cuts are welfare checks written by the taxpayers that come out of the federal treasury. The 'corporate earnings' were already there, it's a zero-sum game of economic semantics.
Eric Parnell, CFA profile picture
Hello Veritzombie,

Thanks for your comment. The article does not mean to suggest that tax cuts create earnings. I often make the remark that the impact of tax cuts on corporate earnings are diminished if companies are earning less. But lower taxes do go a long way in enhancing earnings, as corporations are keeping more in profits after taxes. Moreover, tax cuts also provide greater flexibility for earnings enhancing corporate share buybacks.

So while I agree that tax cuts do not create earnings, they do have a meaningful impact in enhancing them.

Thanks again
UCBKID profile picture
What data do you have to say its a zero sum game??
JOE STERN profile picture
If the tax cuts enable increased spending, that can result in increased sales and earnings, which then results in increased tax receipts. Whether this increase in receipts is enough to offset the decrease caused by lower tax rates is another question. For the first year, definitely not. After that, maybe. It would help if more of the cut were aimed at the lower brackets.
Simpllly profile picture
Linguistics has some classic work as to how the human mind finds transfers of meaning via metaphor. So I'm not surprised a sports metaphor gets transferred to investment.

But do we really has data of this being a reoccurring market phenomenon or is it just an amusing boogeyman of editorial creativity?

Shouldn't we be looking for a head-and-shoulders formation or some other classical top.

All that black swan talk is just another metaphorical transfer that lacks predictive use while adding to the notorious wall of worry metaphor.
Eric Parnell, CFA profile picture
Hi gherzog,

Thanks for your comment and great points to consider.

We do have data of this being a recurring market phenomenon throughout time. This was the focus of a recent article that I wrote at the end of last year.


As for technical factors as they relate to the stock market, you are right that the topping phase of a bull market has some common characteristics worth watching for. And at this stage, I would describe where we are with stocks to be at the very beginning of the beginning of any potential prolonged corrective phase if anything at all at this time. We would need to see much more in the way of technical developments before we could begin to conclude the end of anything in regards to the ongoing bull market. This is something that will likely take months to unfold.

Thanks again
Simpllly profile picture
Your article on the whole is excellentvand information, it's those pesky metaphors that make some readers jump to conclusions.

As Warren Buffett admitted, he made most of his fortune by sitting on his duff and waiting.
jgrever621 profile picture
Higher yield can be explained by the FED selling bonds, meaning buyers will pay less to buy these, so returns start to rise.
Another reason for rates to rise is the FED increasing rates, which they plan to continue doing over the next year or so.
Inflation so far has had no place when counting reasons for higher rates, and even higher wages won't be a bother with a moderate increase in productivity keeping inflation modest.

So, yes, there are strange things going on here.

I am a REIT buyer, and higher interest rates have harmed pricing for these ( But done wonderful things for dividend percentage return).Over time REITs will probably recover, but what is happening now? My personal opinion is that the absence of inflation is the reason pricing for REITs has been collapsing with these higher interest rates.

This is important, as historically REITs have done quite well during periods of rising rates- at least until now, because in the past, rising interest rates have been accompanied by higher inflation.

Not clearly on your point, but illustrates one more example of why this time is somewhat strange in the stock market.

I think 2018 will be an 'interesting' year, and this is another reason I am heavy in REITs, as the dividend income will continue regardless of the stock price. Hopefully, this will be adequate protection for a recession if one does arrive
JOE STERN profile picture
Be careful with those REITs, it seems that in many areas there are more stores than there are customers, with people doing more of their shopping online and visiting restaurants less frequently. Land use patterns may be changing and retail areas may be hit hard.
Scott+K profile picture
Hey Eric...amazing article. I was able to use this as an educational tool for my wife. I've been trying to explain the yield curve and how it can foretell future economic activity, etc...but have failed miserably! You truly did a wonderful job and both of us are grateful for your contribution to the community.
Eric Parnell, CFA profile picture
Hi Scott,

Thanks so much for your comment and your kind words. I genuinely appreciate it and am glad that you and your wife found it useful.

Thanks again!
David-McCormick profile picture
Great article. Numerous great comments too. I especially liked that UCBKID observativon. Competitive devaluations and currency warfare is part of the current game. High debt surley is a drag on the economy. Technological change in some key industries may be helping to restrain production costs and thus yield curve inflation expectations, too. Because of demography in most "first world nations," can one look to data from past decades for comparables? Flat or near flat growth may be a new normal in many economic segments. If deflation gets the upper hand, debt might become difficult to manage, and defaults even more deflationary.
Eric Parnell, CFA profile picture
Hello David,

Thanks for your comment and excellent points on competitive currency devaluations and the challenges of high debt going forward. I agree with your views that deflationary forces may continue to outweigh inflationary for many of the reasons you have cited.

Great points and thanks again
Diana_BR profile picture
Great article. Thank you. One thing I think is missing is a comparison of the current yield curve to the historical mean, for instance last 65 year mean
dhughes327 profile picture
Well thought out article and certainly worth consideration. Unless I speed read passed it, where was the honorable mention to the massive amount of Bonds about to be unloaded by the FED (soon to be $50 Billion per month) along with new issues to pay for new debt, and what effect that will have on bond rates due to supply and demand dynamics???
Eric Parnell, CFA profile picture
Hello dhughes327,

Thanks for your comment and for raising an important topic that I am planning on delving into in another article. While the Fed and their efforts to shrink their balance sheet are certainly worth paying attention to in the months ahead, the amount of bonds that they will be selling at any given point in time will still be relatively small versus the overall Treasury market (it's also worth noting that a fair amount of their balance sheet shrinkage will continue to consist of allowing existing maturities to roll off without the proceeds being reinvested instead of outright Treasury sales). As we saw during QE1, QE2 and QE3 and conversely during the periods when the Fed was not actively engaged in Treasury purchases, the Fed is only one player in a large and vast market. And if many are buying when the Fed is not or selling and many are selling when the Fed is buying, it can result in yields rising as they did during QE1-3 and falling when the Fed stopped buying. As a result, I believe a far greater focus is warranted on China and their Treasury holdings versus how the Fed is managing their holdings.

Great point and thanks for raising it.
Surprised no discussions of stop price for discussed security s example 13 week moving averages etc. so where does authors stand on stop prices? How much of portfolio is at risk? Or do u recommend buying and holding throughout the coming changing markets? What say you?
comfortably numb,
when i was young, i used to smoke those tea leaves.
later on, i actually used them to drink tea, after i tried to read them.
now, i simply arrange them in patterns that act as confirmation bias to
whatever it is that i am doing!!!
i am long a few spots but 60% CASH!!!
GLTA. if Buffet cannot find anything to BUY, then we are likely just
a bit too high here!!!
Sunnysmarket profile picture
You are closer to the truth than we know.
The last time that Lacy Hunt was wrong, I was a mere grasshopper.
Chart Rider profile picture
Invest in the China Belt and Road project. The economic connectivity of 63% of the global population in emerging markets won't be beat by tariffs and walls. My belief is that holding cash is a regressive position replete with lost opportunities.
THANKS!!! great stuff.
perhaps this kind if analysis should be TAUGHT somewhere???
nope, i forgot. colleges these days teach kids WHAT to think
rather than HOW to think!!!
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