So when does the pain of rising yields, which makes it harder to justify stretched equity valuations, start to make a difference? With the yield on the 10-year Treasury note TMUBMUSD10Y, 1.286% moving back above 1.2%, a challenge of the 1.5% area, which is the equivalent of the dividend yield on the S&P 500 SPX, -0.06%, could soon be in store, wrote Sean Darby, global head of strategy at Jefferies, in a Tuesday note.
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Mark Hulbert
Opinion: What signals the top of a bull market in stocks? Not rising interest rates
Last Updated: Feb. 16, 2021 at 5:10 p.m. ET
First Published: Feb. 16, 2021 at 10:45 a.m. ET
By Mark Hulbert
Treasury yields have risen sharply so far this year
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CHAPEL HILL, N.C. — Rising interest rates will not be what sabotage this bull market.
That’s crucial information, since interest rates have risen significantly over the last six months, and especially over the last couple of weeks. The 10-year Treasury yield TMUBMUSD10Y, 1.288% has more than doubled from where it stood last August, for example, from 0.52% to its current 1.20%. A big chunk of that increase—27 basis points—have come just since the beginning of the year.
I am revisiting this topic since many readers apparently weren’t convinced by my column earlier this month that there is no historical correlation between interest rates and stock-market returns. SPX, -0.06% As some of you pointed out, that column focused on summary patterns that emerge when analyzing all data back to the 1920s. That is different than focusing on interest-rate trends at bull-market tops in particular. That’s what I am focusing on in this column.
Since 1962, which is how far back my database for the 10-year Treasury yield extends, there have been 17 bear markets, according to the calendar maintained by Ned Davis Research. In 10 of those 17 cases, the 10-year Treasury yield when those bear market began was actually lower than where it had stood three months prior. In other words, in more than half of the bear markets the 10-year yield had fallen over the last three months of the preceding bull markets.
You shouldn’t conclude from this result that a bear market can’t happen unless interest rates are declining, however. Notice that in seven of these 17 bear markets, interest rates rose over the three months preceding the beginnings of those bear markets. The appropriate conclusion to draw is that interest-rate trends are an unreliable guide to when bull markets will come to an end
‘No peace’ for markets until 10-year Treasury yield hits 2%, strategist says
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A bond market selloff is calling the tune across financial markets, including for foreign exchange. Equilibrium is unlikely to return until the yield on the benchmark 10-year U.S. Treasury note hits 2%, argued one well-known analyst on Friday.
“There will be no peace until U.S. 10s reach 2%,” said Kit Juckes, global macro strategist at Société Générale, in a note.
Rising yields have triggered rotation away from growth-oriented stocks, including large-cap, tech-related shares, into more cyclically sensitive and often value-oriented stocks and sectors. The tech-heavy Nasdaq Composite COMP, -0.59% slipped into correction territory, defined as pullback of 10% from a recent peak, as yields continued to climb, while the S&P 500 SPX, 0.10% and Dow Jones Industrial Average DJIA, 0.90% have traded at records. All three benchmarks are positive on the week, with the Nasdaq bouncing on days when the climb in yields relented.
“The pattern seems clear enough: The equity market is seeing a sector rotation but not a correction; the bond market is seeking a new equilibrium in the light of a vastly improved economic outlook in both the U.S. and elsewhere; some policy makers are pushing back against the bond moves, with little success,” Juckes wrote.
Why a pullback for stocks might be fast approaching, according to Deutsche Bank
Published: April 7, 2021 at 3:15 p.m. ET
The organization that in the U.S. says whether the economy is in a recession or not seems to be asleep on the job.
be asleep on the job ── 仕事中に居眠りする
The National Bureau of Economic Research defines a recession as the period between a peak of economic activity and its subsequent trough, or lowest point. There is no debate that the NBER was correct in calling the last cycle’s peak in February 2020, but the bottom was, if you look at jobless claims, late April, and no later than May if you look at employment or personal income.
For markets, there is significance to when the economy is in expansion or recession. According to research from Deutsche Bank, growth, as measured by the Institute for Supply Management’s manufacturing index, typically peaks 10 to 11 months after a recession ends. That would be right now, if you go by the NBER’s definition of recession and not its stubborn refusal to say it.
Over the last 20 years, there has been a 73% correlation between the annual, rolling gains of the S&P 500 SPX, +0.15% and the level of the ISM manufacturing index. That makes sense — you would expect growth assets, like stocks, to be correlated to measures of economic growth.
According to the Deutsche Bank numbers, the S&P 500 sold off around growth peaks by a median of 8.4%, and dropped by a median of 5.9% when the ISM flattened instead of fell. And the timing of these drops was soon from the peak — usually two weeks after, lasting six weeks in total.
So when that peak comes is important. And Deutsche Bank says it will come in the next three months — not a huge shock given that the March reading registered 64.8%, a 38-year high.
“As growth peaks over the next three months, we expect discretionary investors to pare their positioning from extremely elevated levels, and see retail investors as unlikely to buy the dip. Using the historical experience as a guide argues for a near -6% pullback if growth flattens out near the peak, a bigger -8.4% pullback on an inverted-V in growth,” said strategists led by Binky Chadha.