And, easier tax policy in the form of lower marginal rates on personal income and capital gains is a distinct possibility. Though full economic recovery probably won't appear until next year, it is likely that a sizable stock market rally has already begun. As is always the case, stocks lead the economy by six to nine months. This optimistic view is based on growing evidence that Fed-induced liquidity deflation is ending. In particular, the shape of the Treasury yield curve has moved from inversion to normalcy.
Yield curves tend to lead the economy by six to nine months.
The Fed's single biggest mistake was ignoring the recession-warning yield curve inversion that developed last year. So the positive yield curve spread is almost 145 basis points. A more normal economic recovery spread would be about 225 basis p oints. This positive carry would encourage banks to inject credit into the economy by purchasing two-year notes for their investment accounts. Credit creation is vital to economic recovery.