U.S. stocks are sliding this week, erasing October’s gains, as higher Treasury yields weigh on markets. The Dow Jones Industrial Average DJIA , S&P 500 SPX and Nasdaq Composite COMP were all down heading toward the closing bell on Friday, with each index on pace for a weekly loss. Investors saw this month’s gains evaporate on Thursday, as equities fell under pressure from rising interest rates in the bond market as investors weighed Federal Reserve Chair Jerome Powell’s remarks that another rate hike may be needed to slow the economy and bring down inflation. So far this month, the Dow has slumped 1%, the S&P 500 has…
Tag: Debt/Bond Markets
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Why strategists see 10-year Treasury yield breaching 5% despite Friday’s pullback
The 10-year Treasury yield continued to pull back from 5% on Friday after moving tantalizingly close to surpassing that level in the previous session.
The yield touched 5% at 5:02 p.m. Eastern time on Thursday, only to drift back down, according to Tradeweb data. It ended Friday’s New York session down by 6.3 basis points at 4.924%.
Rising Middle East tensions gave way to renewed safe-haven demand in government debt on Friday that not only sent the 10-year yield
BX:TMUBMUSD10Y
lower, but dragged down rates on everything from 3-month Treasury bills
BX:TMUBMUSD03M
to the 30-year bond
BX:TMUBMUSD30Y.Investors were trying to catch the proverbial falling knife by taking advantage of a cheaper 10-year Treasury note, the product of recent selloffs. Analysts warn that it’s difficult to have much short-term conviction in catching that knife, however, given the likelihood that the selloff could return.
One big reason is the onslaught of new supply from the U.S. Treasury as the result of the government’s growing borrowing needs, which is raising the risk that investors will keep demanding more compensation to hold long-dated debt to maturity.
On Oct. 30 and Nov. 1, which is the same day as the Federal Reserve’s next policy decision, Treasury is expected to provide updated guidance on its borrowing needs and auction sizes. Treasury’s refunding announcement could even upstage the Federal Open Market Committee — creating “fertile ground for a continuation of the selloff in Treasuries,” said BMO Capital Markets rates strategists Ian Lyngen and Ben Jeffery.
Over the next several weeks, “it becomes much easier to envision a surge in Treasury yields in anticipation of the upcoming coupon supply,” they wrote in a note on Friday. While the 10-year yield has stopped shy of 5%, “we continue to expect this milestone will be reached shortly.”
Stock-market investors have been focused on the prospects of a 5% 10-year yield because such a level would dent the appeal of equities and make government debt a more attractive investment by comparison.
Read: Why stock-market investors are fixated on 5% as 10-year Treasury yield nears key threshold
As of Friday, the 10-year yield, used as the benchmark on everything from mortgages to student and auto loans, has jumped 163.9 basis points from its 52-week low of almost 3.29% reached on April 5. The 10-year yield hasn’t ended the New York session above 5% since July 19, 2007.
Meanwhile, all three major stock indexes
DJIACOMP
ended the day lower as the prospects of a widening conflict in the Middle East triggered a flight-to-safety trade into Treasurys.Taking a step back, a 5% 10-year yield would imply that a Goldilocks-scenario of a U.S. economy — one that’s neither too hot or too cold, and able to sustain moderate growth — “is here to stay for a decade,” or that the Fed’s main interest-rate target needs to be materially higher on average over the next decade, according to BMO’s Lyngen and Jeffery. One of the biggest questions facing policy makers is whether the economy might be moving into a new stage in which even higher interest rates down the road could be required to cool demand and activity.
Though BMO Capital Markets is biased toward lower yields into the weekend given the absence of major economic data on Friday, technical indicators “continue to favor higher rates in the near-term,” and “our conviction that 5% will ultimately be traded through has grown.”
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Yields Are Raising a Big Red Flag. What the Risks Are to You.
[ad_2]Call it the mystery of the rising 10-year yield—and it’s led investors straight to the so-called ‘ Treasury Term Premium .’
Source link -
Selloff in Treasurys gains momentum in late afternoon, pushing 3-month through 30-year yields either further above or toward 5%
Tuesday’s selloff in U.S. government debt picked up steam in the late afternoon, sending most Treasury yields either further above or toward 5%. The jump in market-implied rates was led by 3- through 7-year yields, which each rose by 17 basis points, according to FactSet data. The benchmark 10-year rate was up 14.4 basis points at 4.853% after September’s stronger-than-expected retail sales report, and is on pace for its largest one-day jump since at least Sept. 21. Two- and 10-year yields are both heading for their highest closing levels in 16 to 17 years.
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These are the biggest money mistakes we make in our 20s, 30s and 40s
Financial literacy peaks at age 54, according to a 2022 study. That’s around the time you’ve gained enough knowledge and experience to make sound money decisions — and before your cognitive ability might start to ebb.
“As we get older, we seem to rely more on past experience, rules of thumb, and intuitive knowledge about which products and strategies are better,” said Rafal Chomik, an economist in Australia who led the study.
If people in their mid-50s tend to make smart financial moves, where does that leave younger generations?
Advisers often educate clients at different stages of life to avoid money mistakes. While those in their 50s usually demonstrate optimal prudence in navigating investments and savings, advisers keep busy helping others — from twentysomethings to mid-career professionals — avoid costly financial blunders:
Navigate your 20s
Perhaps the biggest blunder for young earners is spending too much and saving too little. They may also lack the long-term perspective that encourages long-range planning.
“The mistake is not establishing the saving habit early, and not appreciating the power of compounding” over time, said Mark Kravietz, a certified financial planner in Melville, N.Y.
Similarly, it’s common for young workers to delay enrolling in an employer-sponsored retirement plan. Not participating from the get-go comes with a steep long-term cost.
“ Better to prioritize debt with the highest interest rate, which can result in paying less interest over the long run. ”
People in their 20s process incoming information quickly. But their high level of fluid intelligence can work against them. Cursory research into a consumer trend or hot sector of the stock market can spur them to make rash investments. Such impulsive moves might backfire.
“It’s important to resist the hype,” Kravietz said. “Don’t chase fads or try to make fast money” by timing the market.
Many young adults with student debt juggle multiple loans. Eager to chip away at their debt, they fall into the trap of choosing the wrong loan to tackle first, says Megan Kowalski, an adviser in Boca Raton, Fla.
Rather than pay off the highest-interest rate loan first (so-called avalanche debt), they mistakenly focus on the smallest loan (a.k.a. snowball debt). It’s better to prioritize debt with the highest interest rate, which can result in paying less interest over the long run.
Navigate your 30s
“ Resist the temptation to lower your 401(k) contribution to boost your take-home pay. ”
By your 30s, insurance grows in importance. You want to protect what you have — now and in the future. But many people in this age group neglect their insurance needs. Or they misunderstand which coverages matter most.
“If you have a life partner and kids, get the proper life insurance while in your 30s,” Kravietz said.
It’s easy to get caught up in your career and assume you can put off life insurance. But even low odds of your untimely death doesn’t mean you can ignore the risk of leaving your loved ones without a cash cushion.
Another common blunder involves disability insurance. If your employer offers short-term disability insurance as an employee perk, you may think you’re all set.
However, the real risk is how you’d earn income if you suffer a serious and lasting illness or injury. Don’t confuse short-term disability insurance (which might cover you for as long as one year) with long-term disability coverage that pays benefits for many years.
Assuming you were wise enough to enroll in your employer-sponsored retirement plan from the outset, don’t slough off in your 30s. Resist the temptation to lower your 401(k) contribution to boost your take-home pay.
“You want to give till it hurts,” Kravietz said. “Keep putting money away” in your 401(k) or other tax-advantaged plan until you feel a sting. Weigh the minor pain you feel now against the major relief of having a much bigger nest egg decades from now.
Navigate your 40s
“ ‘The 40s are often the most expensive in anyone’s life. Life is getting more complicated.’”
For Kravietz, the 40s represent a decade of heavy spending pressures. Mid-career professionals face a mortgage and mounting tuition bills for their children.
“The 40s are often the most expensive in anyone’s life,” he said. “Life is getting more complicated.”
As a result, it’s easy to overlook seemingly minor financial matters like updating beneficiaries on your 401(k) plan or completing all the appropriate estate documents such as a will.
“People in their 40s sometimes fail to update beneficiaries,” Kravietz said. For example, a new marriage might mean changing the beneficiary from a prior partner or current parent to the new spouse.
It’s also easy to get complacent about your investments, especially if you’re the conservative type who favors a set-it-and-forget-it strategy. Instead, think in terms of tax optimization.
“In your 40s, you want to take advantage of what the government gives you,” Kravietz said. “If you have a lot of money in a bank money market account and you’re in a top tax bracket, shifting some of that money into municipal bonds can make sense” depending on your state of residence and other factors.
If you’re saving for a child’s college tuition using a 529 plan — and you have parents who also want to chip in — work together to strategize. Don’t make assumptions about how much (or how little) your parents might contribute to your kid’s education.
“Rather than assume you’ll have to pay a certain amount for educational expenses, coordinate between generations of parents and grandparents” on how much they intend to give, Kowalski said. “That way, you’re not duplicating efforts and you won’t put extra funds in a 529 plan.”
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Why Treasurys could give the U.S. stock market a green light for a year-end rally
The volatility in the world’s biggest bond market in recent weeks has been too much for U.S. stocks to handle as investors come to terms with the likelihood that interest rates will remain high deep into 2024 until underlying inflationary pressures ease.
The U.S. Treasury market, the bedrock of the global financial system, has been hammered by repeated selling since late September, sending the yields on the 10-year and 30-year Treasurys to levels last seen when the economy was moving toward the financial crisis in 200, before yields fell again in the past week.
Back in September a bond market selloff was fueled by a hawkish outlook from the Federal Reserve, along with mounting concern about the U.S. fiscal deficit and federal debt amid the potential for a government shutdown if a budget for the 2024 fiscal year is not settled by mid-November.
Earlier this week though, increased uncertainty about the conflict in the Middle East propelled demand for safer assets and caused longer-term bond prices to jump and their yields to fall.
Then, on Thursday, a Treasury bond auction which saw a pullback in demand despite notably higher yields, sent longer-term rates higher again while investors were already digesting inflation data that showed consumer prices remained elevated in September. The U.S. stocks fell and booked their worst day in five sessions on Thursday.
Investors are now wondering what it will take for interest rates and bond yields to fall in the months ahead and whether a retreat in yields could eventually push stocks higher to rally into the year-end.
Tim Hayes, chief global investment strategist at Ned Davis Research, said “excessive pessimism” in the bond market is setting up for a relief rally both in stock and bond prices as “there’s not as much inflationary pressures as the market has been pricing in,” he told MarketWatch in a phone interview on Thursday.
Hayes said his team found the bond sentiment data has started to reflect a “decisive reversal” away from too much pessimism in the Treasury market which could send bond yields lower and boost equities given the inverse correlations between the S&P 500
SPX
and the 10-year Treasury note yield
BX:TMUBMUSD10Y.
See: Here is what needs to happen for the S&P 500 to hold on to this year’s gains
Meanwhile, some analysts said disinflation may not be enough for the Federal Reserve to drop its “higher-for-longer” interest rate narrative which was primarily responsible for the big spike in yields since September.
The economy needs a slowdown in the consumer sector for some relaxation in the Fed’s “higher-for-longer” narrative and to maybe push policymakers to adopt a more flexible outlook for its long-term guidance, said Thierry Wizman, global FX and interest rates strategist at Macquarie.
“Of course, the Fed right now is certainly not saying anything that’s remotely suggestive of ‘high-for-long’ being taken away or being removed or negated, so I don’t expect yields to fall a lot unless we start to get reasons to believe the Fed is going to remove that narrative based on the economic data,” Wizman told MarketWatch via phone.
However, Wizman said he is confident that the U.S. consumption data will weaken over the next few months when major consumer-product and -service companies start to provide guidance for the fourth quarter, and when U.S. consumers, which have been trapped in a web of conflicting signals on the health of the economy, open their wallet for the holiday shopping season.
“This will produce some weakness on the consumer side of the market and there’s no doubt the slowdown will be more pronounced than most people expect in the economy, [but] that will be the positive scenario for bonds,” said Marco Pirondini, head of U.S. equities at Amundi U.S., in an interview with MarketWatch.
However, that also means investors should not be “too anxious to buy dips in the stock market” because it would be very unusual if the stock market doesn’t see “multiple compression” with Treasury yields at 16-year highs, Wizman said. “Stocks would still look too rich even if the Fed drops the ‘higher-for-longer’ narrative in the first quarter of 2024.”
See: Fed skips rate hike for now, but doesn’t rule out another increase this year
The “higher-for-longer” mantra is an idea Fed officials have tried to get the market to absorb in recent months, with Fed Chair Powell hardening his rhetoric at the September FOMC meeting, pointing potentially to more rate hikes or, more importantly, interest rates that stay higher for longer.
Fed officials saw interest rates coming down to 5.1% in 2024, higher than June’s outlook for rates to finish next year at 4.6%, according to the latest Summary of Economic Projections at the September policy meeting.
See: Stock-market moves show bond traders are still in charge as yields renew rise
However, Wizman characterized the “higher-than-longer” narrative as a “publicity stunt,” as he thought Fed officials simply wanted to signal to the market that they were frustrated that financial conditions hadn’t measurably tightened enough in 2023, so they utilized the narrative to get rising Treasury yields to do some of the “heavy lifting.”
“… Fed officials are not really serious about ‘higher-for-longer’ – they just did it to drive long-term yields higher for now,” he added.
If a slowdown in the consumer sector of the economy and ongoing disinflation are powerful enough to sap Fed’s rate expectations, Treasury yields could continue to decline without having to have a calamity or big recession in the U.S. economy to drive investors back to the safe-haven assets like Treasurys, strategists said.
See: U.S. stock-market seasonality suggests a potential rally in the fourth quarter. Why this time might be different.
Meanwhile, stock-market seasonality may also help lift sentiment. Historically, the fourth quarter has been the best quarter for the U.S. stock market, with the large-cap S&P 500 index up nearly 80% of the time dating back to 1950 and gaining more than 4% on average.
The S&P 500 has risen 0.9% so far in the fourth quarter, while the Dow Jones Industrial Average
DJIA
is up 0.5% and the Nasdaq Composite
COMP
has advanced 1.4% in October, according to FactSet data.“So you have this situation where sentiment got stretched and now sentiment is reversing with more confidence that bond yields have reached their peak, so equities can rally moving into the end of the year, and that should start to become increasingly evident,” said Hayes.
The yield on the 10-year Treasury note dropped 8.2 basis points to 4.628% on Friday, while the yield on the 30-year Treasury
BX:TMUBMUSD30Y
declined by 9.2 basis points to 4.777%. The 30-year yield fell 16.4 basis points this week, its largest weekly drop since the period that ended March 10, according to Dow Jones Market Data. -
These are the biggest money mistakes we make in our 20s, 30s and 40s
Financial literacy peaks at age 54, according to a 2022 study. That’s around the time you’ve gained enough knowledge and experience to make sound money decisions — and before your cognitive ability might start to ebb.
“As we get older, we seem to rely more on past experience, rules of thumb, and intuitive knowledge about which products and strategies are better,” said Rafal Chomik, an economist in Australia who led the study.
If people in their mid-50s tend to make smart financial moves, where does that leave younger generations?
Advisers often educate clients at different stages of life to avoid money mistakes. While those in their 50s usually demonstrate optimal prudence in navigating investments and savings, advisers keep busy helping others — from twentysomethings to mid-career professionals — avoid costly financial blunders:
Navigate your 20s
Perhaps the biggest blunder for young earners is spending too much and saving too little. They may also lack the long-term perspective that encourages long-range planning.
“The mistake is not establishing the saving habit early, and not appreciating the power of compounding” over time, said Mark Kravietz, a certified financial planner in Melville, N.Y.
Similarly, it’s common for young workers to delay enrolling in an employer-sponsored retirement plan. Not participating from the get-go comes with a steep long-term cost.
“ Better to prioritize debt with the highest interest rate, which can result in paying less interest over the long run. ”
People in their 20s process incoming information quickly. But their high level of fluid intelligence can work against them. Cursory research into a consumer trend or hot sector of the stock market can spur them to make rash investments. Such impulsive moves might backfire.
“It’s important to resist the hype,” Kravietz said. “Don’t chase fads or try to make fast money” by timing the market.
Many young adults with student debt juggle multiple loans. Eager to chip away at their debt, they fall into the trap of choosing the wrong loan to tackle first, says Megan Kowalski, an adviser in Boca Raton, Fla.
Rather than pay off the highest-interest rate loan first (so-called avalanche debt), they mistakenly focus on the smallest loan (a.k.a. snowball debt). It’s better to prioritize debt with the highest interest rate, which can result in paying less interest over the long run.
Navigate your 30s
“ Resist the temptation to lower your 401(k) contribution to boost your take-home pay. ”
By your 30s, insurance grows in importance. You want to protect what you have — now and in the future. But many people in this age group neglect their insurance needs. Or they misunderstand which coverages matter most.
“If you have a life partner and kids, get the proper life insurance while in your 30s,” Kravietz said.
It’s easy to get caught up in your career and assume you can put off life insurance. But even low odds of your untimely death doesn’t mean you can ignore the risk of leaving your loved ones without a cash cushion.
Another common blunder involves disability insurance. If your employer offers short-term disability insurance as an employee perk, you may think you’re all set.
However, the real risk is how you’d earn income if you suffer a serious and lasting illness or injury. Don’t confuse short-term disability insurance (which might cover you for as long as one year) with long-term disability coverage that pays benefits for many years.
Assuming you were wise enough to enroll in your employer-sponsored retirement plan from the outset, don’t slough off in your 30s. Resist the temptation to lower your 401(k) contribution to boost your take-home pay.
“You want to give till it hurts,” Kravietz said. “Keep putting money away” in your 401(k) or other tax-advantaged plan until you feel a sting. Weigh the minor pain you feel now against the major relief of having a much bigger nest egg decades from now.
Navigate your 40s
“ ‘The 40s are often the most expensive in anyone’s life. Life is getting more complicated.’”
For Kravietz, the 40s represent a decade of heavy spending pressures. Mid-career professionals face a mortgage and mounting tuition bills for their children.
“The 40s are often the most expensive in anyone’s life,” he said. “Life is getting more complicated.”
As a result, it’s easy to overlook seemingly minor financial matters like updating beneficiaries on your 401(k) plan or completing all the appropriate estate documents such as a will.
“People in their 40s sometimes fail to update beneficiaries,” Kravietz said. For example, a new marriage might mean changing the beneficiary from a prior partner or current parent to the new spouse.
It’s also easy to get complacent about your investments, especially if you’re the conservative type who favors a set-it-and-forget-it strategy. Instead, think in terms of tax optimization.
“In your 40s, you want to take advantage of what the government gives you,” Kravietz said. “If you have a lot of money in a bank money market account and you’re in a top tax bracket, shifting some of that money into municipal bonds can make sense” depending on your state of residence and other factors.
If you’re saving for a child’s college tuition using a 529 plan — and you have parents who also want to chip in — work together to strategize. Don’t make assumptions about how much (or how little) your parents might contribute to your kid’s education.
“Rather than assume you’ll have to pay a certain amount for educational expenses, coordinate between generations of parents and grandparents” on how much they intend to give, Kowalski said. “That way, you’re not duplicating efforts and you won’t put extra funds in a 529 plan.”
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Dow Jones ekes out gain Friday, stocks mostly advance for the week as Israel-Gaza war escalates
U.S. stocks closed mostly lower Friday, but the Dow Jones and S&P 500 posted weekly gains, as the Israel-Gaza war appeared to escalate heading into the weekend. The Dow Jones Industries
DJIA,
+0.12%
rose about 39 points, or 0.1%, on Friday, ending near 33,670, according to preliminary FactSet data. The S&P 500 index
SPX,
-0.50%
fell 0.5% and the Nasdaq Composite Index
COMP,
-1.23%
closed 1.2% lower. The S&P 500’s energy segment outperformed Friday, gaining 2.3%, as U.S. benchmark crude surged nearly 6% after Israel ordered more than a million people in Gaza to evacuate to the south. Treasury yields fell, with the 10-year Treasury
TMUBMUSD10Y,
4.626%
rate retreating to 4.628% Friday, snapping a 5-week yield climb, according to Dow Jones Market Data. Bond prices and yields move in the opposite direction. Investors bought other haven assets too, including gold
GC00,
+0.23%
and the U.S. dollar
DXY,
+0.07% .
Wall Street’s “fear gauge”
VIX,
+15.76%
also touched its highest level in more than a week. Even so, the Dow Jones booked at 0.8% weekly gain, the S&P 500 advanced 0.5% and the Nasdaq fell 0.2%. -
Treasuries Are Signaling Weak Demand. What’s Ailing The Market.
30-Year Treasuries Had an Ugly Auction. What’s Behind the Weak Demand.
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Subprime car-loan rates are hitting 17%-22%. Should investors be worried?
Many borrowers with subprime credit have been paying 17% to 22% rates on new auto loans this year as the Federal Reserve’s inflation fight takes a toll on lower-income households.
That borrowing range reflects the average cost, or annual percentage rate, for a loan in recent subprime auto bond deals, according to Fitch Ratings, an increase from last year’s average APR of closer to 14%.
Higher borrowing costs can mean households need to put more of their income into monthly auto payments, ramping up the risks of late payments, defaults and car repossessions. Those risks, however, have yet to make investors flinch.
The subprime auto sector already has cleared almost $30 billion of new bond deals this year, according to Finsight, a pace that’s slightly below volumes from the past two years, but still above historical levels since 2008.
The subprime auto bond market is revved up, even as borrowing rate soar
Finsight
“I do believe there has to be a reckoning if rates stay higher for longer,” said Tracy Chen, a portfolio manager on Brandywine Global Asset Management’s global fixed income team.
Figuring out when the tumult might hit has proven difficult. Instead of slowing, the economy has shown resilience despite the Fed lifting its policy rate to a 22-year high of 5.25% to 5.5%. The central bank also indicated it might need to keep rates higher for some time to fight inflation. Longer-duration bond yields, as a result, have pushed higher, but still hover below 5%.
Subprime standoff
Inflation eats away at paychecks, especially those of lower-wage workers, a problem the Fed hopes to solve by keeping borrowing rates elevated. A gauge of inflation out Thursday showed consumer prices were steady at a 3.7% yearly rate in September, above the Fed’s 2% target.
“This recession has been on everyone’s mind for the past three years,” Chen said. While she thinks the economy will likely contract in the middle of 2024, a lot of damage could be done before that. “The longer rates stay here, the harder the landing.”
For now, the Fed is widely expected to hold rates steady at its next meeting in November. “Fed policy makers are now shifting their focus from ‘how high’ to raise the policy rate to ‘how long’ to maintain it at restrictive levels,” said EY Chief Economist Gregory Daco, in emailed comments.
Stocks were flat to slightly higher in choppy trade at midday Thursday after the inflation report came in hotter than forecast, with the Dow Jones Industrial Average
DJIA
near unchanged and the S&P 500 index
SPX
up 0.2%.Past recessions and the burden of higher interest costs typically hit lower-wage workers harder, making subprime credit a canary in the coal mine for the rest of financial markets. Even so, investors in subprime auto bonds have yet to demand significantly more spread, or compensation, to offset potentially higher defaults among these borrowers.
Related: Subprime auto defaults on path toward 2008 crisis levels, say portfolio managers
Take the AAA rated 2-year slice of a new bond deal issued in mid-October by one of the subprime auto sector’s biggest players. It priced at a spread of 115 basis points above relevant risk-free rate, up from a spread of 90 basis points on a similar bond issued in August, according to Finsight, which tracks bond data.
When factoring in Treasury rates, the yield on the bonds bumped up to about 6% and 5.7%, respectively. The shot at higher returns and low delinquencies in subprime auto bonds have likely helped with investor confidence. The rate of subprime auto loans at least 60-day past due in bond deals was about 5% in September, according to Intex, up from historic lows around 2.5% two years ago.
“I think people still feel confident,” Chen said of subprime auto bonds. When putting a recent bond out on a Wall Street list to gauge its market value, she said bids come in right away.
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Dividend stocks are dirt cheap. It may be time to back up the truck.
The stock market always overreacts, and this year it seems as if investors believe dividend stocks have become toxic. But a look at yields on quality dividend stocks relative to the market underlines what may be an excellent opportunity for long-term investors to pursue growth with an income stream that builds up over the years.
The current environment, in which you can get a yield of more than 5% yield on your cash at a bank or lock in a yield of 4.57% on a10-year U.S. Treasury note
BX:TMUBMUSD10Y
or close to 5% on a 20-year Treasury bond
BX:TMUBMUSD20Y
seems to have made some investors forget two things: A stock’s dividend payout can rise over the long term, and so can it is price.It is never fun to see your portfolio underperform during a broad market swing. And people have a tendency to prefer jumping on a trend hoping to keep riding it, rather than taking advantage of opportunities brought about by price declines. We may be at such a moment for quality dividend stocks, based on their yields relative to that of the benchmark S&P 500
SPX.Drew Justman of Madison Funds explained during an interview with MarketWatch how he and John Brown, who co-manage the Madison Dividend Income Fund, BHBFX MDMIX and the new Madison Dividend Value ETF
DIVL,
use relative dividend yields as part of their screening process for stocks. He said he has never seen such yields, when compared with that of the broad market, during 20 years of work as a securities analyst and portfolio manager.Dividend stocks are down
Before diving in, we can illustrate the market’s current loathing of dividend stocks by comparing the performance of the Schwab U.S. Equity ETF
SCHD,
which tracks the Dow Jones U.S. Dividend 100 Index, with that of the SPDR S&P 500 ETF Trust
SPY.
Let’s look at a total return chart (with dividends reinvested) starting at the end of 2021, since the Federal Reserve started its cycle of interest rate increases in March 2022:
FactSet
The Dow Jones U.S. Dividend 100 Index is made up of “high-dividend-yielding stocks in the U.S. with a record of consistently paying dividends, selected for fundamental strength relative to their peers, based on financial ratios,” according to S&P Dow Jones Indices.
The end results for the two ETFs from the end of 2021 through Tuesday are similar. But you can see how the performance pattern has been different, with the dividend stocks holding up well during the stock market’s reaction to the Fed’s move last year, but trailing the market’s recovery as yields on CDs and bonds have become so much more attractive this year. Let’s break down the performance since the end of 2021, this time bringing in the Madison Dividend Income Fund’s Class Y and Class I shares:
Fund 2023 return 2022 return Return since the end of 2021 SPDR S&P 500 ETF Trust 14.9% -18.2% -6.0% Schwab U.S. Dividend Equity ETF -3.8% -3.2% -6.9% Madison Dividend Income Fund – Class Y -4.7% -5.4% -9.9% Madison Dividend Income Fund – Class I -4.7% -5.3% -9.7% Source: FactSet Dividend stocks held up well during 2022, as the S&P 500 fell more than 18%. But they have been left behind during this year’s rally.
The Madison Dividend Income Fund was established in 1986. The Class Y shares have annual expenses of 0.91% of assets under management and are rated three stars (out of five) within Morningstar’s “Large Value” fund category. The Class I shares have only been available since 2020. They have a lower expense ratio of 0.81% and are distributed through investment advisers or through platforms such as Schwab, which charges a $50 fee to buy Class I shares.
The opportunity — high relative yields
The Madison Dividend Income Fund holds 40 stocks. Justman explained that when he and Brown select stocks for the fund their investible universe begins with the components of the Russell 1000 Index
RUT,
which is made up of the largest 1,000 companies by market capitalization listed on U.S. exchanges. Their first cut narrows the list to about 225 stocks with dividend yields of at least 1.1 times that of the index.The Madison team calculates a stock’s relative dividend yield by dividing its yield by that of the S&P 500. Let’s do that for the Schwab U.S. Equity ETF
SCHD
(because it tracks the Dow Jones U.S. Dividend 100 Index) to illustrate the opportunity that Justman highlighted:Index or ETF Dividend yield 5-year Avg. yield 10-year Avg. yield 15-year Avg. yield Relative yield 5-year Avg. relative yield 10-year Avg. relative yield 15-year Avg. relative yield Schwab U.S. Dividend Equity ETF 3.99% 3.41% 3.20% 3.16% 2.6 2.1 1.8 1.6 S&P 500 1.55% 1.62% 1.79% 1.92% Source: FactSet The Schwab U.S. Equity ETF’s relative yield is 2.6 — that is, its dividend yield is 2.6 times that of the S&P 500, which is much higher than the long-term averages going back 15 years. If we went back 20 years, the average relative yield would be 1.7.
Examples of high-quality stocks with high relative dividend yields
After narrowing down the Russell 1000 to about 225 stocks with relative dividend yields of at least 1.1, Justman and Brown cut further to about 80 companies with a long history of raising dividends and with strong balance sheets, before moving further through a deeper analysis to arrive at a portfolio of about 40 stocks.
When asked about oil companies and others that pay fixed quarterly dividends plus variable dividends, he said, “We try to reach out to the company and get an estimate of special dividends and try to factor that in.” Two examples of companies held by the fund that pay variable dividends are ConocoPhillips
COP,
-0.29%
and EOG Resources Inc.
EOG,
+0.52% .Since the balance-sheet requirement is subjective “almost all fund holdings are investment-grade rated,” Justman said. That refers to credit ratings by Standard & Poor’s, Moody’s Investors Service or Fitch Ratings. He went further, saying about 80% of the fund’s holdings were rated “A-minus or better.” BBB- is the lowest investment-grade rating from S&P. Fidelity breaks down the credit agencies’ ratings hierarchy.
Justman named nine stocks held by the fund as good examples of quality companies with high relative yields to the S&P 500:
Company Ticker Dividend yield Relative yield 2023 return 2022 return Return since the end of 2021 CME Group Inc. Class A CME,
+0.47% 2.04% 1.3 31% -23% 1% Home Depot, Inc. HD,
-0.39% 2.79% 1.8 -3% -22% -25% Lowe’s Cos., Inc. LOW,
+0.27% 2.17% 1.4 3% -21% -19% Morgan Stanley MS,
-1.54% 4.24% 2.7 -3% -10% -13% U.S. Bancorp USB,
-0.25% 5.89% 3.8 -22% -19% -37% Medtronic PLC MDT,
-4.32% 3.62% 2.3 1% -23% -22% Texas Instruments Inc. TXN,
-0.21% 3.30% 2.1 -3% -10% -12% United Parcel Service Inc. Class B UPS,
-0.16% 4.17% 2.7 -8% -16% -23% Union Pacific Corp. UNP,
+1.52% 2.52% 1.6 2% -16% -15% Source: FactSet Click on the tickers for more about each company, fund or index.
Now let’s see how these companies have grown their dividend payouts over the past five years. Leaving the companies in the same order, here are compound annual growth rates (CAGR) for dividends.
Before showing this next set of data, let’s work through one example among the nine stocks:
-
If you had purchased shares of Home Depot Inc.
HD,
-0.39%
five years ago, you would have paid $193.70 a share if you went in at the close on Oct. 10, 2018. At that time, the company’s quarterly dividend was $1.03 cents a share, for an annual dividend rate of $4.12, which made for a then-current yield of 2.13%. - If you had held your shares of Home Depot for five years through Tuesday, your quarterly dividend would have increased to $2.09 a share, for a current annual payout of $8.36. The company’s dividend has increased at a compound annual growth rate (CAGR) of 15.2% over the past five years. In comparison, the S&P 500’s weighted dividend rate has increased at a CAGR of 6.24% over the past five years, according to FactSet.
- That annual payout rate of $8.36 would make for a current dividend yield of 2.79% for a new investor who went in at Tuesday’s closing price of $299.22. But if you had not reinvested, the dividend yield on your five-year-old shares (based on what you would have paid for them) would be 4.32%. And your share price would have risen 54%. And if you had reinvested your dividends, your total return for the five years would have been 75%, slightly ahead of the 74% return for the S&P 500 SPX during that period.
Home Depot hasn’t been the best dividend grower among the nine stocks named by Justman, but it is a good example of how an investor can build income over the long term, while also enjoying capital appreciation.
Here’s the dividend CAGR comparison for the nine stocks:
Company Ticker Five-year dividend CAGR Dividend yield on shares purchased five years ago Dividend yield five years ago Current dividend yield Five-year price change Five-year total return CME Group Inc. Class A CME,
+0.47% 9.46% 2.44% 1.55% 2.04% 20% 42% Home Depot Inc. HD,
-0.39% 15.20% 4.32% 2.13% 2.79% 54% 75% Lowe’s Cos, Inc. LOW,
+0.27% 18.04% 4.14% 1.81% 2.17% 91% 109% Morgan Stanley MS,
-1.54% 23.16% 7.62% 2.69% 4.24% 80% 108% U.S. Bancorp USB,
-0.25% 5.34% 3.60% 2.78% 5.89% -39% -26% Medtronic PLC MDT,
-4.32% 6.65% 2.90% 2.10% 3.62% -20% -9% Texas Instruments Inc. TXN,
-0.21% 11.04% 5.24% 3.10% 3.30% 59% 82% United Parcel Service Inc. Class B UPS,
-0.16% 12.23% 5.56% 3.12% 4.17% 33% 56% Union Pacific Corp. UNP,
+1.52% 10.20% 3.37% 2.07% 2.52% 34% 49% Source: FactSet This isn’t to say that Justman and Brown have held all of these stocks over the past five years. In fact, Lowe’s Cos.
LOW,
+0.27%
was added to the portfolio this year, as was United Parcel Service Inc.
UPS,
-0.16% .
But for most of these companies, dividends have compounded at relatively high rates.When asked to name an example of a stock the fund had sold, Justman said he and Brown decided to part ways with Verizon Communications Inc.
VZ,
-0.94%
last year, “as we became concerned about its fundamental competitive position in its industry.”Summing up the scene for dividend stocks, Justman said, “It seems this year the market is treating dividend stocks as fixed-income instruments. We think that is a short-term issue and that this is a great opportunity.”
Don’t miss: How to tell if it is worth avoiding taxes with a municipal-bond ETF
-
If you had purchased shares of Home Depot Inc.
-
U.S. stocks post 3-session climb as bond yields, oil retreat
U.S. stocks booked a 3-session win streak Tuesday as oil prices and bond yields retreated. The Dow Jones Industrial Average
DJIA,
+0.40%
climbed about 134 points, or 0.4%, ending near 33,739, according to preliminary FactSet data. That was the longest streak of straight wins for the blue-chip index in a month, and the best three days of gains since late August, according to Dow Jones Market Data. The S&P 500 index
SPX,
+0.52%
advanced 0.5% and the Nasdaq Composite Index
COMP,
+0.58%
gained 0.6%. It was the third session in a row of gains for all three indexes. The brighter backdrop for stock market came as oil prices
CL00,
-0.69%
and bond yields
TMUBMUSD10Y,
4.663%
retreated and after Raphael Bostic, head of the Atlanta Fed, said he didn’t think additional rate hikes were needed to bring inflation down to the central bank’s 2% annual target, but also that he still sees rates staying high for a “long time.” -
1970s-style stagflation may be at risk of repeating itself, Deutsche Bank warns
A major Wall Street bank is warning about the risk that inflation expectations could become unanchored in a fashion similar to the 1970s stagflation era.
Weekend attacks on Israel by Hamas illustrate how geopolitical risks can suddenly return — adding to the surprise shocks of the current decade, such as the COVID-19 pandemic and Russia’s invasion of Ukraine, said macro strategist Henry Allen and research analyst Cassidy Ainsworth-Grace of Frankfurt-based Deutsche Bank
DB,
-1.40% .Read: Questions emerge over how Israeli intelligence missed Hamas attack
Oil prices settled more than 4% higher on Monday as traders weighed the impact of the war in the Middle East on crude supplies. The spike in energy prices is adding to the growing list of similarities to the 1970s era — which also includes consistently above-target inflation across major economies and repeated optimism about how quickly it would fall; strikes by workers; and even increasing chances that this winter will be dominated by the El Niño weather pattern, similar to what took place in 1971 and which is historically tied to higher commodity prices, according to Deutsche Bank.
Inflation remains above central banks’ targets in every G-7 country — the U.S., Canada, France, Germany, Italy, Japan, and the United Kingdom. How long it will remain high is one of the most important questions facing financial markets, and a destabilization of expectations would make it even harder for policy makers to restore price stability.
“So given inflation is still above its pre-pandemic levels, it is important not to get complacent about its path,” Allen and Ainsworth-Grace wrote in a note released on Monday. “After all, if there is another shock and inflation remains above target into a third or even a fourth year, it is increasingly difficult to imagine that long-term expectations will repeatedly stay lower than actual inflation.”
History indicates that the last mile of inflation is often the hardest. One of the key lessons of the 1970s was that inflation failed to return to previous levels after the first oil shock of 1973 and U.S. recession of 1973-1975, and went even higher following a second oil shock in 1979. Now that inflation has been above target for the last two years, “a fresh inflationary spike could well lead expectations to become unanchored,” according to the Deutsche Bank note.
Source: Bloomberg, Deutsche Bank
For now, the public’s inflation expectations, as measured by a New York Fed survey of consumers in August, remain largely stable, though still above the Federal Reserve’s 2% target.
The current period differs from the 1970s era in a number of ways, the Deutsche Bank team also points out. Long-term inflation expectations remain “impressively” well-anchored, commodity prices have fallen substantially from their peaks over the past 12 to 18 months, and supply-chain disruptions that emerged during the pandemic have “broadly healed.” In addition, the U.S. is less energy intensive than in the past and less susceptible to damage from a 1970s-style energy shock.
Even so, “it is vitally important to avoid complacency,” Allen and Ainsworth-Grace wrote. “Indeed, with the benefit of hindsight, one of the mistakes of the 1970s was that policy was eased up too early, which contributed to a resurgence in inflation.”
Risk-off sentiment prevailed in financial markets during the early part of Monday, before stocks turned higher during the New York afternoon. All three major U.S. stock indexes
DJIACOMP
finished higher in a volatile session. Trading in U.S. government-debt futures reflected greater demand and gold rallied as a flight to safety took hold. The cash market for Treasurys was closed for Columbus Day and Indigenous Peoples Day. -
U.S. stocks end higher despite climbing oil prices, Israel-Gaza war
U.S. stocks booked back-to-back gains on Monday, despite rising oil prices and a deadly weekend assault on Israeli by Hamas that left hundreds dead. The Dow Jones Industrial Average
DJIA,
+0.59%
rose about 197 points, or 0.6%, ending near 33,604, shaking off earlier weakness, while the S&P 500 index
SPX,
+0.63%
advanced 0.6% and the Nasdaq Composite Index
COMP,
+0.39%
gained 0.4%, according to preliminary FactSet data. U.S. benchmark oil prices
CL00,
+4.34%
rose 4.3% to $86.38 a barrel as traders gauged potential implications of the Israel-Gaza war on crude supplies from the Middle East. Investors also flocked to haven assets, including gold
GC00,
+1.62%
and the U.S. dollar
DXY,
+0.03% ,
while cash trading in the $25 trillion Treasury market was closed for the Columbus Day and Indigenous Peoples Day holiday. Israel on Monday seal off the Gaza Strip from food, fuel and other supplies as the conflict between Israel and Hamas intensified, according to the Associated Press. -
1970’s-style stagflation may be at risk of repeating itself, bank warns
A major Wall Street bank is warning about the risk that inflation expectations could become unanchored in a fashion similar to the 1970s stagflation era.
Weekend attacks on Israel by Hamas illustrate how geopolitical risks can suddenly return — adding to the surprise shocks of the current decade, such as the COVID-19 pandemic and Russia’s invasion of Ukraine, said macro strategist Henry Allen and research analyst Cassidy Ainsworth-Grace of Frankfurt-based Deutsche Bank
DB,
-1.45% .Read: Questions emerge over how Israeli intelligence missed Hamas attack
Oil prices jumped by more than 4% on Monday as traders weighed the impact of the war in the Middle East on crude supplies. The spike in energy is adding to the growing list of similarities to the 1970s era — which also includes consistently above-target inflation across major economies and repeated optimism about how quickly it would fall; strikes by workers; and even increasing chances that this winter will be dominated by the El Niño weather pattern, similar to what took place in 1971 and which is historically tied to higher commodity prices, according to Deutsche Bank.
Inflation remains above central banks’ targets in every Group-of-7 country — the U.S., Canada, France, Germany, Italy, Japan, and the United Kingdom. How long it will remain high is one of the most important questions facing financial markets, and a destabilization of expectations would make it even harder for policy makers to restore price stability.
“So given inflation is still above its pre-pandemic levels, it is important not to get complacent about its path,” Allen and Ainsworth-Grace wrote in a note released on Monday. “After all, if there is another shock and inflation remains above target into a third or even a fourth year, it is increasingly difficult to imagine that long-term expectations will repeatedly stay lower than actual inflation.”
History indicates that the last mile of inflation is often the hardest. One of the key lessons of the 1970s was that inflation failed to return to previous levels after the first oil shock of 1973 and U.S. recession of 1973-1975, and went even higher following a second oil shock in 1979. Now that inflation has been above target for the last two years, “a fresh inflationary spike could well lead expectations to become unanchored,” according to the Deutsche Bank note.
Source: Bloomberg, Deutsche Bank
For now, the public’s inflation expectations, as measured by a New York Fed survey of consumers in August, remain largely stable, though still above the Federal Reserve’s 2% target.
The current period differs from the 1970s era in a number of ways, the Deutsche Bank team also points out. Long-term inflation expectations remain “impressively” well-anchored, commodity prices have fallen substantially from their peaks over the past 12 to 18 months, and supply-chain disruptions that emerged during the pandemic have “broadly healed.” In addition, the U.S. is less energy intensive than in the past and less susceptible to damage from a 1970s-style energy shock.
Even so, “it is vitally important to avoid complacency,” Allen and Ainsworth-Grace wrote. “Indeed, with the benefit of hindsight, one of the mistakes of the 1970s was that policy was eased up too early, which contributed to a resurgence in inflation.”
Risk-off sentiment prevailed in financial markets on Monday, with all three major U.S. stock indexes
DJIACOMP
down in New York afternoon trading. Trading in U.S. government-debt futures reflected greater demand and gold rallied as a flight to safety took hold. The cash market for Treasurys was closed for Columbus Day and Indigenous Peoples Day. -
‘Fear trade’: What Israel-Hamas war means for oil prices and financial markets
Oil traders on Sunday said crude prices were likely to remain supported in the near term, as investors assessed the fallout from the surprise attack by Hamas on Israel and focused on the role played by Iran and the potential impact on that country’s petroleum exports.
The conflict may also hold market-moving consequences for talks aimed at normalizing relations between Saudi Arabia and Israel.
“While in the short term there is no impact directly on supply, it’s obvious how things play out over the next 24 to 48 hours could change that,” Phil Flynn, an analyst at Price Futures Group in Chicago, told MarketWatch.
Brent crude futures
BRN00,
+4.17% ,
the global benchmark, and West Texas Intermediate oil futures
CL00,
+4.35% CL.1,
+4.35%
jumped more than 3% when the market opened Sunday night. U.S. stock-index futures
ES00,
-0.66%
traded lower, while traditional havens, including gold
GC00,
+0.98%
and the U.S. dollar
DXY
rose.Movements in oil prices, meanwhile, will also serve as a gauge for broader market worries around the conflict, analysts said.
See: Israeli stocks slump in first day of trade since Gaza attack
Hamas, the Iran-backed, Palestinian militant group that controls the Gaza Strip, staged a sweeping attack on southern Israel early Saturday. News reports put Israeli deaths at more than 700. The Gaza Health Ministry said 413 people, including 78 children and 41 women, were killed in the territory as Israel retaliated, according to the Associated Press. Injuries in Israel and Gaza were both said to be around 2,000.
Israeli troops on Sunday were engaged in fierce fighting in an effort to retake territory in southern Israel as Hamas launched further barrages of missiles. Israeli citizens and soldiers were captured and are being held hostage in Gaza, according to the Israeli military.
Read: Israel declares war, approves ‘significant’ steps to retaliate after surprise attack by Hamas
The Wall Street Journal reported that Iranian security officials helped Hamas plan the attack. U.S. officials said they haven’t seen evidence of Iran’s involvement, the report said.
“Iran remains a very big wild card and we will be watching how strongly [Israeli] Prime Minister Netanyahu blames Tehran for facilitating these attacks by providing Hamas with weapons and logistical support,” said Helima Croft, head of global commodity strategy at RBC Capital Markets, in a Sunday morning note.
Iranian crude exports have risen in recent years, indicating the Biden administration has adopted a soft approach to sanctions enforcement, Croft said. Some analysts have put Iranian crude production at more than 3 million barrels a day and exports above 2 million barrels a day — the highest levels since the Trump administration pulled the U.S. out of the Iranian nuclear accord in 2018, according to the Wall Street Journal. Sales fell to around 400,000 barrels a day in 2020 as the U.S. reimposed sanctions.
RBC Capital Markets
Hedge-fund manager Pierre Andurand, one of the world’s best energy traders, said in a social-media post that a large price spike for oil isn’t likely in coming days, but emphasized the market focus on Iran.
“Now, over the last six months we have seen a very large increase in Iranian supply due to weak enforcement of sanctions. As Iran is also behind Hamas’ attacks on Israel, there is a good probability that the U.S. administration will start enforcing those sanctions on Iranian oil exports more tightly,” he wrote. “That would further tighten the oil market. Also the probability that this will lead to direct conflict with Iran is not zero.”
Meanwhile, the Wall Street Journal late Friday reported that Saudi Arabia had told the White House it would be willing to boost oil production next year if crude prices remained high, as part of an effort aimed at winning goodwill in Congress for a deal that would see the kingdom recognize Israel and in return get a defense agreement with the U.S.
A Saudi production cut of 1 million barrels a day that was implemented in July and recently extended through the end of the year has been given much of the credit for a rally that took global benchmark Brent crude within a few dollars of the $100-a-barrel threshold before retreating this past week. The U.S. benchmark last week briefly topped $95 a barrel for the first time in 13 months.
In a statement, Saudi Arabia’s foreign ministry called on both sides to halt the escalation and exercise restraint, but also recalled its “repeated warnings of the dangers of the explosion of the situation as a result of the continued occupation, the deprivation of the Palestinian people of their legitimate rights, and the repetition of systematic provocations against its sanctities.”
With the Israeli government vowing an unprecedented response, “it is hard to envision how Saudi normalization talks can run on a parallel track to a ferocious military counteroffensive,” said RBC’s Croft.
Beyond oil, much will depend on the potential for the conflict to widen.
Stocks have stumbled, retreating from 2023 highs set in late July, as yields on U.S. Treasurys have jumped. The yield on the 30-year Treasury bond
BX:TMUBMUSD30Y
rose 23.2 basis points last week to end Friday at 4.941%, its highest since Sept. 20, 2007. The 10-year Treasury note yield
BX:TMUBMUSD10Y
topped 4.80% on Oct. 3, its highest since Aug. 8, 2007, and ended the week at 4.783%. Yields and debt prices move opposite each other.The U.S. bond market will be closed Monday for the Columbus Day and Indigenous People’s Day holiday, while U.S. stock markets will be open.
The S&P 500 index
SPX
rose 0.5% last week, breaking a streak of four straight weekly declines, while the Dow Jones Industrial Average
DJIA
fell 0.3% and the Nasdaq Composite
COMP
gained 1.6%.“I think there will be a negative reaction. However, I don’t see a meltdown,” Peter Cardillo, chief market economist at Spartan Capital Securities, told MarketWatch.
Traditional haven plays, including gold, the dollar and U.S. Treasurys may see a strong move upward, with price gains for Treasurys pulling yields down.
“Geopolitical crises in the Middle East have usually caused oil prices to rise and stock prices to fall,” said economist Ed Yardeni, president of Yardeni Research Inc., in a note. “More often than not, they’ve also tended to be buying opportunities in the stock market.”
The broader market reaction will depend on whether the crisis turns out to be a short-term flare-up or “something much bigger, like a war between Israel and Iran,” he said. The latter is unlikely, but tensions between the two are likely to escalate.
“The price of oil may be a good way to assess the likelihood of a broader conflict,” he said.
-
U.S. stocks staged a surprising rally on Friday. But can the party last?
U.S. stocks saw a surprising bounce on Friday, culminating in the S&P 500 index’s biggest intraday comeback since the March banking crisis, even though a monthly jobs report for September came in much higher than expected.
So, are investors no longer worried about the Federal Reserve’s inflation fight or higher interest rates wrecking the U.S. economy?
“Stocks initially sold off on the blockbuster jobs report which indicates the Fed may not be done,” said Gina Bolvin, president of Bolvin Wealth Management Group. “However, after digesting the strong labor market is still strong, stocks rallied. And why shouldn’t they? Will good news- finally – be good news?”
Bolvin said part of the rally could be seasonal, with September typically being a rough months for stocks. There also has been increased optimism that the earnings recession for American corporations may be over, she said.
Analysts are predicting corporate earnings growth rates of 5.9% for the fourth quarter for S&P500 companies, according to John Butters, senior earnings analyst at FactSet. Estimates are for the third-quarter of 2023 after the stock index’s fourth straight quarterly earnings decline on a year-over-year basis.
At Friday’s session lows, the S&P 500 index
SPX
was down 0.9%, but it ended up posting a 1.2% advance, its largest intraday comeback since March 24, 2023, according to Dow Jones Market Data. The Dow Jones Industrial Average
DJIA
booked a 0.9% gain and the Nasdaq Composite Index
COMP
rose 1.6% higher.“The movement in stocks today is certainly encouraging given yields are up as well,” said Chris Fasciano, portfolio manager, Commonwealth Financial Network. “But we will need to see follow through next week.”
The yield on 10-year Treasury
BX:TMUBMUSD10Y
note rose for five straight weeks in a row to 4.783% on Friday, while the 30-year yield
BX:TMUBMUSD30Y
rose to 4.941%, according to Dow Jones Market Data.Read: Why 5% bond yields could wreak havoc on the market
While the U.S. stock-market will be open for business on Monday, the bond market will be closed for Columbus Day and Indigenous Peoples Day holiday, giving investors somewhat of a pause before a big week of economic data that could shape the Fed’s next decision on interest rates.
“Ultimately, stocks and bonds will take their cues next week from the economic releases,” Fasciano told MarketWatch.
Key items on the calendar for the week will be September inflation reports, with the producer-price index on Wednesday and the consumer-price index due Thursday. In between, Fed minutes of its policy meeting in September also are due to be released Wednesday.
“That makes next week an important week for the future direction of both the bond and equity markets as the Fed will certainly be focused on those reports prior to their next meeting on Oct. 31-Nov. 1,” Fasciano said.
-
U.S. stocks stage a surprising rally on Friday. But can the party last?
U.S. stocks saw a surprising bounce on Friday, culminating in the S&P 500 index’s biggest intraday comeback since the March banking crisis, even though a monthly jobs report for September came in much higher than expected.
So, are investors no longer worried about the Federal Reserve’s inflation fight or higher interest rates wrecking the U.S. economy?
“Stocks initially sold off on the blockbuster jobs report which indicates the Fed may not be done,” said Gina Bolvin, president of Bolvin Wealth Management Group. “However, after digesting the strong labor market is still strong, stocks rallied. And why shouldn’t they? Will good news- finally – be good news?”
Bolvin said part of the rally could be seasonal, with September typically being a rough months for stocks. There also has been increased optimism that the earnings recession for American corporations may be over, she said.
Analysts are predicting corporate earnings growth rates of 5.9% for the fourth quarter for S&P500 companies, according to John Butters, senior earnings analyst at FactSet. Estimates are for the third-quarter of 2023 after the stock index’s fourth straight quarterly earnings decline on a year-over-year basis.
At Friday’s session lows, the S&P 500 index
SPX
was down 0.9%, but it ended up posting a 1.2% advance, its largest intraday comeback since March 24, 2023, according to Dow Jones Market Data. The Dow Jones Industrial Average
DJIA
booked a 0.9% gain and the Nasdaq Composite Index
COMP
rose 1.6% higher.“The movement in stocks today is certainly encouraging given yields are up as well,” said Chris Fasciano, portfolio manager, Commonwealth Financial Network. “But we will need to see follow through next week.”
The yield on 10-year Treasury
BX:TMUBMUSD10Y
note rose for five straight weeks in a row to 4.783% on Friday, while the 30-year yield
BX:TMUBMUSD30Y
rose to 4.941%, according to Dow Jones Market Data.Read: Why 5% bond yields could wreak havoc on the market
While the U.S. stock-market will be open for business on Monday, the bond market will be closed for Columbus Day and Indigenous Peoples Day holiday, giving investors somewhat of a pause before a big week of economic data that could shape the Fed’s next decision on interest rates.
“Ultimately, stocks and bonds will take their cues next week from the economic releases,” Fasciano told MarketWatch.
Key items on the calendar for the week will be September inflation reports, with the producer-price index on Wednesday and the consumer-price index due Thursday. In between, Fed minutes of its policy meeting in September also are due to be released Wednesday.
“That makes next week an important week for the future direction of both the bond and equity markets as the Fed will certainly be focused on those reports prior to their next meeting on Oct. 31-Nov. 1,” Fasciano said.
-
Why 5% bond yields could wreak havoc on the market
The yield on the 30-year Treasury bond briefly rose above 5% again on Friday, opening the door to the likelihood of a more sustainable rise above that mark and the risk that the benchmark 10-year yield follows — moves which could wreak havoc across financial markets.
One big reason is that investors are likely to demand greater compensation for taking risk as yields hover around some of the highest levels of the past 16 years, asset managers said. Corporate credit spreads could keep widening in a sign of worsening economic conditions and higher overall risk. And with returns on government debt becoming a more favorable option for investments, the stock market may be vulnerable to repeated drubbings.
Stock investors nonetheless shook off Friday’s stunning official jobs report for September, which saw the U.S. add almost twice as many jobs as forecasters had expected. All three major stock indexes
DJIACOMP
finished higher even though yields climbed on everything from the 1-month T-bill
BX:TMUBMUSD01M
to the 30-year bond
BX:TMUBMUSD30Y.
The yield on the long bond finished at 4.941% — the highest level since Sept. 20, 2007 — after rising past 5% during the New York morning. The rate on the 10-year note
BX:TMUBMUSD10Y
ended at 4.783%, the second-highest level of this year.Yields are returning to more normal-looking levels that prevailed before the 2007-2009 recession as the result of aggressive selloffs in government debt. More important than the absolute level of yields is the speed with which they have been heading to 5%. In the words of analyst Ajay Rajadhyaksha of Barclays earlier this week, there’s “no magic level” that will turn the current selloffs into a rally, and stocks have substantial room to reprice lower before bonds stabilize.
“I think the market isn’t breaking yet, but a 5% 10-year yield is coming,” said Robert Daly, who manages $4.5 billion in assets as director of fixed income at Glenmede Investment Management in Philadelphia. “We’re already here on 30s and not that far away on 10s. Investors are trying to figure what level breaks the market, and I don’t think you can put your finger on the pulse as to what that level is.”
Still, “a higher level of interest rates and yields is going to start having ramifications for broader markets at large,” leaving many investors hesitant to buy just about anything due to the volatility, Daly said via phone on Friday, after the release of September’s hot payrolls data.
Friday’s data, which showed the U.S. creating 336,000 new jobs last month or almost double what economists had expected, is opening the door to a possible interest rate hike by the Federal Reserve on Nov. 1. The strong labor market means the Fed’s higher-for-longer mantra in rates is still in play and “the market is in a tenuous position to navigate all these things because of all the uncertainty,” Daly said.
“Yields sustainably above 5% for a longer period of time will act as a weight on the market in terms of how you value risk compensation,” he said. “Investors are going to ask for more compensation to take risk and when you see liquidity evaporate more and more, that’s what’s going to turn the market over.”
Friday’s price action was the second time this week that data related to the robust U.S. labor market has triggered a bonds selloff. On Tuesday, a snapback in U.S. job openings for August sent the 10- and 30-year yields to their highest closing levels since August-September of 2007.
The next day, high-grade corporate-credit spreads widened for a seventh consecutive session. Daniel Krieter, a fixed-income strategist at BMO Capital Markets, wrote that “if rates continue to move higher or simply remain at these elevated levels for a significant period of time, it is going to have a pronounced effect on the creditworthiness of corporate borrowers, particularly in the high yield space.”
In a note on Friday, Krieter’s colleagues, rates strategists Ian Lyngen and Ben Jeffery, wrote that “it’s not difficult to envision 10s maintain a range between 4.75% and 5.00%.”
“The longer 10s hold this range, the more convinced the market will become that elevated yields are here to stay,” Lyngen and Jeffery said. “Admittedly, we’ve been surprised by the muted response in U.S. equities from the spike in yields and expect that’s due in part to the expectation for a swift reversal. In the event a correction fails to materialize, stocks will be overdue for a more meaningful reckoning.”
The risk of “something breaking” will remain top of mind and “there is no shortage of risks facing equities and credit as rates continue to climb,” they added. “It’s not only the outright level of yields, but the length of time that borrowing costs stay elevated will also hold implications for risk asset valuations.”
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S&P 500 scores best day in 3 weeks as bond yields ease back
U.S. stocks finished higher on Wednesday as yields on long government bonds retreated from 16-year highs, helping lift the S&P 500 to its best day in three weeks. The Dow Jones Industrial Index
SPX,
+0.81%
gained about 125 points, or 0.4%, ending near 33,128, according to preliminary FactSet data. The boost, however, failed to push the blue-chip index back into the green for the year, a day after its gains for 2023 were erased. The S&P 500 index
SPX,
+0.81%
rose 0.8%, marking its biggest daily climb since September 14, according to FactSet data. The Nasdaq Composite Index
COMP,
+1.35%
shot up 1.4%. U.S. bond yields have surged since late September when the Federal Reserve indicated that rates likely will stay higher for longer than initially anticipated as it works to keep inflation in check. The sharp bond-market repricing has made buyers reluctant to step in, sending yields higher and creating ripples in financial markets. The 10-year Treasury
TMUBMUSD10Y,
4.739%
fell 6.6 basis points Wednesday to 4.735%, while the 30-year Treasury yield
TMUBMUSD30Y,
4.868%
shed 6 basis points to 4.876%, after briefly topping 5% late Tuesday. Investors remain focused on political upheaval in Washington and the prospect of a November government shutdown. Friday also brings the monthly jobs report for September, which is expected to show a cooling labor market, but still a low 3.7% unemployment rate.
