Yielding Ground: Rising Rates Seem to Temper Enthusiasm for Stocks

U.S. equities faltered on Friday as Treasury yields continued higher, helped by economic data that continued to show strength.

5 min read

Key Takeaways

  • Yield on 10-year Treasury hits multi-year high above 3.2%.

  • Unemployment rate hits its lowest point since the 1960s.

  • Weaker-than-forecast headline jobs growth could be due to weather.

(Friday Market Close) The selling that began Thursday rolled into Friday, sending stocks on a two-day ride downward amid higher interest rates even as investors eyed mostly solid payrolls data.

The yield on the benchmark 10-year Treasury note climbed to new seven-year highs above 3.2% by late Friday, and that appeared to interrupt the party stocks threw earlier this week when the Dow Jones Industrial Average ($DJI) hit new all-time highs. The $DJI fell nearly 1% on Thursday and was down more than 0.6% into Friday’s closing bell. 

Economic Growth and Yields

Treasury yields continued higher on Friday as economic data continued to show strength. True, the headline number on the September jobs report was disappointing, showing that 134,000 non-farm jobs were created when 184,000 had been expected by a consensus of economists provided by Briefing.com. 

But that figure may have been weighed down by the effect of Hurricane Florence, meaning the deeper fundamentals of a strong economy could still be intact. Indeed, the government upwardly revised job growth for both July and August, meaning that combined growth in those two months is now 87,000 above the previous mark. Plus, the September report showed unemployment fell to 3.7%, the lowest since the late 1960s. 

The strong data came on the heels of a much stronger-than-expected private-sector payroll report from Automatic Data Processing (ADP) and Moody’s Analytics, strong numbers for factory orders, an ISM non-manufacturing index that hit an all-time high, and an ISM manufacturing that, despite a drop, remained near historic highs.

Has Stocks Vs. Bonds Relationship Hit Tipping Point?

Tipping points can be fun. After all, a seesaw would be pretty boring without one. 

But tipping points can also seem scary. Investors may be wondering whether this week’s trading has offered a tipping point for the relationship between stocks and bonds, and that anxiety seems to have some equity investors headed for the exits.

For some time now, some analysts have been expecting government debt yields to start rising meaningfully above the psychologically important 3% mark, and this week they have. That can spook some investors because rising rates can increase corporate borrowing costs and dent expansion plans. 

Also, the gains in yields come as strong economic data seem to have some investors selling fixed income securities, which are often seen as cautionary and bought in times of economic distress. The strong data can be seen as inflationary and may have some investors wondering whether the Fed might accelerate the pace of its planned rate hikes. Comments this week from Federal Reserve Chairman Jerome Powell that were upbeat on the U.S. economy and seemed to reaffirm that more rate hikes are to comealso appeared to help push yields higher.

With equities reaching record highs earlier this week, some investors may be thinking now is a good time to book some profits. The bigger question is whether the rally in stocks may be petering out, since the ultra-low interest rates that have supported stock market growth are now well in the past. In addition, there’s some fear that with earnings season getting started next week, CEOs might strike a cautious tone and possibly take the wind out of the sails.

An argument against a fading of the stock market rally is that the money coming out of bonds and equities will likely find a new home somewhere. If U.S. economic data continues to be strong, that could argue for the money finding its way back into domestic equities, especially if this earnings season ends up being as strong as forecast. A strong U.S. market could also end up pulling more money in from some overseas jurisdictions.

Another thing that remains to be seen is how much momentum the yield rally has. All markets seek equilibrium, so yields could toggle back if they rise enough to where investors start being attracted to bonds again and start buying them instead of selling.

Silver Linings

Arguably, all this economic growth we’re seeing would be good for stocks. That’s one reason why a higher yield environment isn’t all bad for equities. After all, the Fed wouldn’t be raising interest rates unless it thought that the economy was strong enough. It’s just that some investors fret that the central bankers might overshoot and raise rates more than what seems good for the stock market.

Also, rising rates are generally good for banks, which can charge more for loans than they pay for deposits, helping their margins. Financials proved to be one of the better performing sectors this week. Info tech got pounded, but someone forgot to give utilities the memo the last couple of days. That sector rose 0.5% Thursday and was solidly higher again Friday even though it’s a yield-sensitive sector that often does poorly when bond yields climb. The same is sometimes true of energy stocks, but a lot of energy stocks are still paying 4% and 5% yields, so the question is whether some investors find a 3.2% 10-year yield more attractive. 

Utilities and other dividend payers may be up because some investors feel like they’ve seen this movie before. There’ve been a number of rallies in Treasury yields this year, but they’ve tended to sink back into their ranges, and sellers of dividend stocks got burned. The ranges are getting higher, though, and the 3.2% mark for the 10-year Treasury note yield was seen as an important psychological level by some analysts. The yield was at 3.23% late in the day Friday.

While it’s always good to pay attention to individual sectors as well as macro-economic trends, long-term investors may want to keep in mind that tipping points can go both ways, and it can take a while to see what trends emerge and what might be the best way to make sure your portfolio is balanced in a way that matches your goals.

FIGURE 1: COMP Conks: The Nasdaq (COMP) was among the hardest hit sectors Thursday and Friday as stocks broke down, with tech stocks hit especially hard. Meanwhile, the Dow Jones Industrial Average (purple line) also took a beating after setting new highs earlier in the week. Data Source: Nasdaq, S&P Dow Jones Indices. The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.  

Good Trading, 



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Economic Calendar for this week. Source: Briefing.com

Key Takeaways

  • Yield on 10-year Treasury hits multi-year high above 3.2%.

  • Unemployment rate hits its lowest point since the 1960s.

  • Weaker-than-forecast headline jobs growth could be due to weather.

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