Will A Higher Ten Year Yield Cause A Decline In Stocks?

Energy Hasn’t Been Great

Energy has had great 12 month returns, but that was following its worst decline in about 100 years. The decline was based on the fundamentals, but a cyclical macro swing came in the sector’s favor. The energy sector has had a brutal past 5 years. As you can see from the chart below, the S&P 500 energy sector has had a negative ROIC minus WACC rate for all but 3 quarters in the past 5 years. Keep in mind, the best energy companies are in the S&P 500. Most of the small and mid-caps have done even worse. One thing is certain: the recent bottom won’t be surpassed for a while. It’s not clear if the sector will get its ROIC above its WACC in the next upcycle.

Low Quality Might Be Done

The chart below ascribes all the increases in low-quality stocks to monetary policy which may or may not be correct. If you think that’s true, the rally in low quality stocks is probably mostly over. While the Fed might not hike rates soon, it will likely end QE next year. The market will probably price that in ahead of time (later this year). The fiscal stimulus is going out now, but the future might not be as bright if a tax hike passes. That would be the first tax hike since 1993.

Conclusion

The 10-year yield hitting 2% might not cause a correction because correlations aren’t stationary. The Fed’s average inflation targeting implies it won’t hike rates anytime soon. Polls show around half of the stimulus checks won’t be spent. We think most will be spent. The stock market will be less popular for retail traders this summer when other entertainment options are available. Biden plans to raise taxes on the rich. That will hurt equities. Energy businesses have been horrible for almost all of the past 5 years. However, 2021 won’t be as bad as 2020. The rally in low-quality stocks might end after the Fed announces it will start to unwind QE and Biden hikes taxes. That news might come in the 2nd half of this year.

1 2 3
View single page >> |

Disclaimer: The content in this article is for general informational and entertainment purposes only and should not be construed as financial advice. You agree that any decision you make will be ...

more
How did you like this article? Let us know so we can better customize your reading experience.

Comments

Leave a comment to automatically be entered into our contest to win a free Echo Show.