Last week's partial yield curve inversion following a"dovish surprise" from the Federal Reserve is bearish for the stock market and that means investors should"remain defensively positioned," Morgan Stanley's U.S. equity strategist Michael Wilson said on Monday.
On Friday, the yield on 3-month Treasury bills rose above that of 10-year Treasury notes. Part of the broader inversion pattern, the ascent of the 3-month yield above the 10-year yield is an important economic recession indicator. Additionally, this was the first time these two yields inverted since 2007.
The Fed said it will begin reducing the bonds on its balance sheet in May and end the roll-off of Treasurys in September. Called quantitative tightening, this program is the unwind of a decade-long program of stimulating financial markets through a quantitative easing program. But, following the announcement, Wilson said the central bank"did not get the reaction they expected as the yield curve immediately inverted.
Wilson said that, before the Fed's announcement, it"seemed unlikely" that the central bank would have"a more dovish policy message.
Message is short rates coming down.
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