This graphic via Urban Carmel on Twitter:

Other than 1994, rising 10 year yields are usually pretty good for stocks. The two best stretches of this current bull market other than the initial rally from the March 2009 bottom–2013 and 2017–featured rising bond yields.

One thing I will say about the current stock drop as a result of spiking bond yields is that perhaps the past year’s stock rally was built on misplaced assumptions that bond yields would be sub-1% for the foreseeable future, when in reality the crash in bond yields that happened early in 2020 was an anomaly and was always due to mean-revert back higher. The 10-year is currently yielding what it was yielding in February 2020, pre-Covid:

It’s just now getting back to that level. The 75% drop in the 10-year yield that happened during the Covid crash was not “real” in the same way the 36% drop in the stock market over that same time wasn’t “real,” it was a drastic overreaction.

It just took bond yields longer to recover to pre-Covid highs.

With the 10 year yielding well below 1%, as it was for most of 2020, of course stocks were going to explode higher. Nobody in their right mind would prefer 10 year treasuries yielding 0.6% over tech stocks.

But now that bond yields are at a more normal level, stocks don’t have as great an advantage over them in investors’ eyes. It’s not as much of a no-brainer anymore, so stocks are correcting to reflect the fact that the “attractiveness gap” between stocks and bonds has narrowed quite a bit in recent months.

Over the long haul, rising bond yields have been good for stocks. So I think this chart bolsters the idea that this market correction is temporary and not the start of a cataclysm.

I have no idea what’s going to happen with the stock market: is this THE crash or is it just a correction within an ongoing bull run? I am looking at data points in favor of both sides so that no matter what happens, it won’t blindside me. I want to be able to fully understand the case for both outcomes, so this is why I have been presenting seemingly contradictory data points (i.e. “this is a sign we’re entering a huge bear market,” and “this is a sign this is just a minor correction and we’ll keep rallying eventually.”).

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