U.S. stocks opened higher on Thursday, with the Dow Jones Industrial Average up over 100 points, or 0.5 percent, in the first 20 minutes of trading. That’s in marked contrast to Wednesday, when equities tumbled in one of the most notable routs for the market in recent years. Traders are understandably excited about today’s rebound, but the last few days have been, in general, unsettling for traders, many of whom are still searching for the indicators that turned sour before the crash.
For example, the former “Fear Gauge” on the Chicago Board Options Exchange has sunk to just 10, meaning it has reached levels seen only two weeks ago. Volatility, meanwhile, has increased: S&P 500 “momentum” trading — where traders buy stocks and sell them immediately — fell, even though stocks are often a good value. Traders are looking for large returns to justify these risk appetites, and, for some, the rally means stocks are now so cheap they make the most sense after falling so much. But one possible reason for the rally is the flattening of the yield curve.
If mortgage rates rise, rates on government debt held by the Federal Reserve will tend to rise, so the curve will flatten, too. This creates a headwind for the economy. As the yield curve flattens, the Fed is forced to raise interest rates more quickly and stimulate the economy further. Mr. Krugman’s caution, in The Times, over the short-term outlook is this: “For those who may be tempted to welcome the decline, I think there are several cautions.
First, by betting on this market, you may be falling into the trap of expecting signs of what the market is betting on. If rates go up, the Fed is likely to raise interest rates more fast and faster than many are currently anticipating. You can end up being left holding the bag, and then the original yearn to be a hero can lead you to blame the market for making you look stupid. Second, you’re probably placing your chances of making any money on the line with one simple indicator: your own confidence. You could lose everything. Or do as few people do, and keep your money invested.