All of this suggests that markets may remain volatile in the near term. A longer-term rally in equity prices is possible, but it would require continued improvements of the factors mentioned above. A renewed softening in economic data or an additional downturn in oil prices could easily spook investors and trigger another risk-off move. Additionally, the bond market is not signaling an all-clear sign. U.S. Treasury yields remain quite low and have been slower to advance than equity prices. High yield spreads have declined, but also signal signs of risk.
Nevertheless, as we stated earlier, we do not expect the U.S. economy to weaken and think the odds of a recession are low. A slow (if uneven) improvement in economic growth should boost corporate earnings. That, in turn, should help pave the way for equity prices to move higher.