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The Stock Market In 2019: The Story From The Bond Market

Dec. 05, 2018 6:14 AM ET6 Comments
John M. Mason profile picture
John M. Mason


  • Two months ago, economist Martin Feldstein was picturing a substantial stock market correction in 2019 or so due to rising longer-term interest rates.
  • Since then, longer-term interest rates have fallen, presenting us with a completely different picture of what might cause a substantial stock market correction in 2019.
  • The key stories seem to be embedded in the analysis of what is happening in the bond market, something that portrays very real possibilities for the future.

In late October, Harvard economist and former head of President Reagan’s Council of Economic Advisors, Martin Feldstein, laid out a scenario for a substantial decline in the United States stock market.

The picture he drew was one of rising interest rates.. Mr. Feldstein perceived the yield on the 10-year US Treasury note rising to 5.00 percent or more.

At the time, I felt there was little reason to argue with his story.

To Mr. Feldstein, the consequence of the rising longer-term interest rates was a following drop in stock prices.

Well, over the past month or so, the scene has changed.

There may be a decline in the US stock market in the future, but the fall may be for entirely different reasons.

And, the question follows, does today’s large drop in stock market prices anticipate a further fall that might be more than just a correction in the level of the stock market?

Some, including myself, have argued that the US stock market is over valued. After nine years or so of easy monetary policy, a policy specifically aimed at “goosing up” stock prices so as to create a wealth effect to generate more consumer spending, which would underwrite the economic recovery, the US stock market has produced levels that seem substantially out of line with corporate earnings.

For example, the Cyclically Adjusted Price Earnings (CAPE) measure, created by Yale economist Robert Shiller in July 2018, touched a level, 33.31, that was higher than the level reached in September 1929, just at the beginning of the stock market crash that was connected with the Great Depression.

The CAPE measure has dropped off a little since then; it came in at 30.57 in November 2018, but even this was substantially above the mean for the series, something that the CAPE measure always reverts

This article was written by

John M. Mason profile picture
John M. Mason writes on current monetary and financial events. He is the founder and CEO of New Finance, LLC. Dr. Mason has been President and CEO of two publicly traded financial institutions and the executive vice president and CFO of a third. He has also served as a special assistant to the secretary of the Department of Housing and Urban Development in Washington, D. C. and as a senior economist within the Federal Reserve System. He formerly was on the faculty of the Finance Department, Wharton School, the University of Pennsylvania and was a professor at Penn State University and taught in both the Management Division and the Engineering Division. Dr. Mason has served on the boards of venture capital funds and other private equity funds. He has worked with young entrepreneurs, especially within the urban environment, starting or running companies primarily connected with Information Technology.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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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