Stock Market Cycles & Upcoming Decade

Will Something Break?

The 10 year yield has been rising quickly. Some investors are shocked by this, but they shouldn’t be. We had one of the fastest recoveries in the stock market ever. If anything, investors should be surprised the rise in the 10 year yield took so long too start. It was obvious four months ago that the 10 year yield wouldn’t stay this low with the coming reopening and additional stimulus. The initial increase in November due to the vaccine news and Biden winning the election was just the beginning of what was to come.

As you can see from the chart below, the 10 year yield’s increase is now the second quickest ever.

Many investors are waiting for something to ‘break’ because such a rise is usually indicative of a major shift. The most obvious candidate of something breaking is high multiple tech stocks. Any expensive stock is at risk of weakness. In addition, many tech stocks face tough comps along with less demand due to the reopening. This situation is much different from 1994. The economy isn’t breaking; it is healing. It’s a positive to see the yield rise because it means the vaccination process is going smoothly. 109 million doses have been administered. The country should be 75% vaccinated within 5 months at this rate.

This Is New

The rise in the 10 year yield has caused the Nasdaq to underperform the S&P 500. This sounds like an obvious relative performance because speculative growth stocks don’t like rising rates. The financials and energy stocks in the S&P 500 have been doing well. While it sounds obvious, the correlation between the 10 year yield and the S&P 500’s outperformance is at a record high. This must be because the Nasdaq has never been this much of a long duration play. If you looked at the relationship between the Nasdaq 100 and the Dow Jones, the difference would be even starker.

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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 ...

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