A correlation between inverted yield curves and higher commodity prices spells stagflation and severe danger for stock market
Fred Day
Nov. 26, 2006

Analytics and quantitative models show inversion of yield curves and higher commodity prices cause stagflation. Stagflation once detected by the market is worst for equities. If history is any indicator of the future the stock market is in severe danger.

However, stocks that are paying relatively high dividends can be shielded from the collapse in the stock market. The stock market will get divided in two groups. Dividend paying stocks and no-dividend paying stocks. After the top is in place, a serious divergence between these stocks will be evident. It is already in place. While Dow is at all time high, Nasdaq could not even recover one quarter of the grounds lost during 200-2003.

But what is the effect on these stocks when stagflation is transparent to the market? It is not clear how the market will react. For now the market is overlooking the stagflation effect. But stagflation will eventually turn into deflation. It is easy to control inflation by raising rates. It is equally difficult to boost the economy in a stagflation driven environment.

When the dividends stop coming in, the markets will collapse.

A correlation between inverted yield curves and higher commodity prices spells stagflation and severe danger for stock market
Fred Day
Analytics and quantitative models show inversion of yield curves and higher commodity prices cause stagflation. Stagflation once detected by the market is worst for equities.
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