The stock market entering a bear market？

On March 6, 2020, the US stock market continued its decline today after a few days of rebound. Is this the beginning of a bear market in the stock market? Next, let's analyze one important indicator of entering the bear market, Treasury bonds yield.

What is the yield of Treasury bonds? Treasury bonds are a tool issued by the state to raise funds. When the bonds are issued, they promise to repay the principal and interest on a specified date. The ratio of the return of Treasury bonds to the principal invested is the return of Treasury bonds.

The main factors affecting bond yield include coupon rate, maturity, face value, holding time, purchase price, and sale price. Rising bond yields and falling bond prices mean investors are selling bonds, turning to invest activities, or entering the stock market.

In a healthy economic environment, the longer the Treasury bonds, the higher the bond yield. Because short-term bonds are more liquid, investors are willing to accept lower yields. Linking the bond yields of different years on the chart is the bond yield curve.

The remaining maturity of the bond is on the abscissa and the bond yield is on the ordinate. The bond yield curve can reflect the current market economic conditions, and it is expected that the market economy will trend in the future.

Source: Federal Reserve Bank of St. Louis

Investors believe that bond yields are upside down and the market economy is about to decline. This situation usually occurs once every ten years, but after each occurrence, the market economy will decline.

So, what is an inverted yield curve? Will there be a recession? The inverted yield curve means that the long-term Treasury bonds yield is lower than the short-term Treasury bonds yield. When investors are not optimistic about the market economy or the economy is in recession, the market expects the Fed to reduce the chances of raising interest rates, and even implement loose monetary policy, implement interest rate reductions, or quantitative easing.

Market funds sell short-term bond markets and buy long-term bonds. Short-term bond prices fell, and short-term bond yields rose. In contrast, long-term bond prices rose and long-term bond yields fell. When an inverted yield curve occurs, it will also affect the operation of the physical enterprise and the operation of the market economy.

S&P500 Index

By analyzing the historical data of the US stock market, an economic recession has occurred in the past decades when an inverted yield curve occurs. As an investor, when the economic bubble appears and an inverted yield curve occurs, it is necessary to predict that a bear market is imminent and make the correct investment transaction deployment.

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