Here's why the recent stock market sell-off could save us from a repeat of 'Black Monday'

Jurrien Timmer, director of global macro for Fidelity Investments, published his analysis following the recent US stock market pullback. According to Timmer, “The reason for the sell-off seems simple enough: The stock market has finally started to pay attention to the bond market again.”

Timmer says that before the recent meltdown, markets ignored this very important part of equity valuations bringing back memories of 1987 – when the stock market rallied while bond yields were rallying until stocks crashed on “Black Monday.”

According to Timmer, last week’s drop happened despite an increase in the consensus earnings estimates for 2018. Which he says has more logic than it seems.

“But in a way this is quite logical, because amid the euphoria of rising corporate earnings it has been clear that both the equity and bond markets were being too complacent about the other side of that trade: tax cuts could push the economy toward the overheating phase. If that happened, the Fed would likely raise rates with implications for interest rates in general.”

This may not be all bad news. Timmer says that it is better for the stock market to rates now “rather than keep ignoring them and suffering a much worse fate later, as it did in 1987.”

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