In recent months the US equity markets have become increasingly sensitive to movements in treasury yields.
BMO Capital Markets: – U.S. equity markets stumbled this week, with the S&P 500 sliding 2.1% and the Dow now skidding almost 4% from the record close set earlier this month. Most of the damage came on Thursday alongside a host of factors including disappointing July industrial production, downbeat corporate news from some Dow heavies and, perversely, a drop in jobless claims to the lowest level since 2007. The latter helped stoke expectations that Fed tapering is fast approaching, and pushed the 10-year Treasury yield above 2.8% for the first time in more than two years. Indeed, while not a big fan of the whole ‘good news is bad news’ refrain,it’s hard to ignore the recent inability of the equity market to absorb upward moves in bond yields.
In fact the correlation between the S&P500 and the 10yr treasury yield hit a new post-recession low (higher yields driving stock prices lower).
Not surprisingly, it was the high-dividend shares that have been most impacted by rising rates (higher rates decrease the present value of future dividends). After an impressive performance this spring, high dividend shares now lag the S&P 500 by over 3% for the year (on average).
Furthermore, if rates continue to rise, higher cost of borrowing will ultimately begin to eat into earnings – and will be immediately reflected in stock prices. At this stage the stock market in the US (and to some extent globally) is taking its lead from treasuries.
From our sponsor:
Wall Street Examiner Disclosure: Lee Adler, The Wall Street Examiner reposts third party content with the permission of the publisher. The opinions expressed in these reposts are not those of the Wall Street Examiner or Lee Adler, unless authored by me, under my byline. I curate posts here on the basis of whether they represent an interesting and logical point of view, that may or may not agree with my own views. Some of the content includes the original publisher's promotional messages. No endorsement of such content is either expressed or implied by posting the content. All items published here are matters of information and opinion, and are neither intended as, nor should you construe it as, individual investment advice. Do your own due diligence when considering the offerings of information providers, or considering any investment.