Got Bond Concerns?

The market largely continued last week’s mixed moves, with the S&P and Nasdaq mildly retreating from record highs and the Dow eking out another record close.

The sentiment remains mostly rosy thanks to earnings that continue to impress, plummeting virus numbers worldwide, indicators that the economic recovery is gaining steam, and imminent stimulus.

But we’re not out of the woods yet, and I still worry about complacency and valuations.

But now, you can add one more concern to the list- rising bond yields.

On Tuesday (Feb. 16), the 10-year Treasury yield jumped 9 basis points to top 1.30% for the first time since February 2020. The 30-year rate also hit its highest level in a year.

Why is this concerning?

Rising interest rates=less attractive stocks.

Sure, the banks benefit. But what do you think this means for growth sectors such as tech that have benefited from low-rates?

You couple that with the fact that according to the Buffet Indicator (Total US stock market valuation/GDP), the market could be 228% overvalued, and tech stocks may be at valuations not seen since the dotcom bubble? Genuine concerns.

A rebound in rates could also put a dent in the economic recovery if both companies and consumers find it increasingly expensive to borrow.

While I don’t foresee a crash like we saw last March and feel that the wheels are in motion for a healthy 2021, I still maintain that some correction before the end of Q1 could happen.

Bank of America also echoed this statement and said last week that “We expect a buyable 5-10% Q1 correction as the big ‘unknowns’ coincide with exuberant positioning, record equity supply, and as good as it gets’ earnings revisions.”

Corrections are healthy and normal market behavior, and we are long overdue for one. They are also way more common than most realize. Only twice in the last 38 years have we had years WITHOUT a correction (1995 and 2017).

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Disclaimer: All essays, research, and information found above represent analyses and opinions of Matthew Levy, CFA and Sunshine Profits' associates only. As such, it may prove wrong and be ...

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