Bull Steepener
Financial Market Phase (Liquidity Market)
The period ordinary people find hardest to understand—why on earth are stock prices rising when the economy is bad?
In the yield curve, short-term interest rates fall rapidly and long-term interest rates fall slowly, forming a normal curve and widening the term spread.
- Why stock prices rise in a financial market phase
- Interest rates are low.
- Deposit rates are low, so investors make risk-taking investments even if there is risk.
- Borrowing costs are cheap.
- Because the economy is not in good shape, trading centers on heavy large-cap stocks (construction, financials, consumer staples).
The short end of the yield curve, which is based on short-term interest rates, is determined by expectations about Fed policy; it rises when the Fed is expected to raise rates and falls when it is expected to cut rates. The long end of the yield curve is influenced by factors such as inflation outlook, investor demand and supply, economic growth, and institutional investors trading large amounts of fixed-income securities.
It is also called a financial market, and literally means that liquidity—that is, money—floods into the stock market and pushes stock prices up.
The funds that create this liquidity market are generated as the bubble in the bond market, a safe asset, collapses. Conversely, when bubbles in risk assets such as stocks and real estate collapse, money moves from the risk-asset market to the safe-asset market, and a reverse liquidity market unfolds in the risk-asset market.
The biggest feature of a liquidity market is that the stock prices of almost all stocks soar without any improvement in earnings. This is the difference from an earnings market.
In a liquidity market, interest-rate-sensitive stocks such as banks and securities firms soar in particular, because the bond market collapse causes interest rates to rise and money to overflow, increasing trading volume. As trading volume increases, securities firms see more brokerage commissions and their earnings structure improves. As a result, financial sector stocks rise sharply.
Afterwards, it transitions to an Earnings-Driven Market.
Link:: Investopedia
Category: Wiki/Economy