10 Year Yield Hits 3.09%: Still No Panic In Stocks

Slight Decline On Tuesday

The stock market was down slightly on Tuesday as the S&P 500 was down 0.68% and the Dow was down 0.78%. The Dow ended its streak of 8 straight up days. The Russell 2000 was actually flat after it underperformed Monday. The sector performances show the main action on the day was the reflation trade as long bond yields rose due to increased inflation and growth expectations. Energy and the financials were the best performing sectors as energy was up 0.01% and the financials were down 0.16%. The worst sectors were real estate and healthcare which were down 1.67% and 1.29% respectively. We haven’t seen much weakness in housing related to increasing interest rates.

Rising Yields Won’t Hurt Stocks

I’ve already discussed that stocks won’t necessarily decline when yields rise. It’s not as if the 10 year will hit 5% or even 4% anytime soon. It’s very disingenuous to spark fear because the 3 month yield is higher than the S&P 500’s dividend yield. Firstly, buybacks are more popular than they were in previous cycles, so dividends aren’t the only way capital is returned to shareholders. Therefore, it’s better to look at the earnings yield than the dividend yield. Secondly, the 3 month yield was much higher than the dividend yield in the past when interest rates were higher. There will be declines in the dividend stocks, but that doesn’t mean the whole market will fall.

The chart below shows the recent relationship between the weekly change in the 10 year bond yield and the weekly change in the MSCI world index. As you can see from the chart on the left, there has been no correlation between the two since the November 2016 election. Yields have risen and stocks have risen. There might be a point where rising yields hurt stocks, but we aren’t there yet. For retail investors looking to earn money in their retirement accounts, getting 2.57% on the 2 year treasury isn’t going to prevent them from investing in equities which could provide double digit returns. The headlines today are very disingenuous as they claim stocks fell because interest rates rose. They are as ridiculous as the joke chart on the right showing a vomiting flamingo. The headline writers will completely forget the idea that yields cause stocks to fall if stocks rally tomorrow as yields increase.

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