2021 Q2 Commentary…
Can stocks and interest rates go up at the same time? Yes, they can, and they often do. Right now, we are in a period of recovery from economic shutdowns across the globe. As companies are forced to raise prices in 2021 and meet a return in consumer demand, we are watching inflation like a hawk. Specifically, we pay very close attention to the 10-year treasury note yield as our sentiment barometer.
First, a quick education on why the 10-year treasury yield matters…
▪ Treasury securities are loans to the federal government. Maturities range from weeks to as many as 30 years.
▪ Because they are backed by the U.S. government, Treasury securities are seen as a safer investment relative to stocks.
▪ Bond prices and yields move in opposite directions—falling prices boost yields, while rising prices lower yields.
▪ The 10-year yield is used as a proxy for mortgage rates. It’s also seen as a sign of investor sentiment about the economy.
How high can the 10-year treasury yield go before we do see it adversely affect the performance of the stock market? Some economists predict it’s 3%. Others say it’s 2.5%. The truth is that their predictions don’t really matter. What matters to us is the rate of change in inflation data that typically drives the change in interest rates. If the rate of change of inflation is increasing quarter over quarter, it signals a robust recovery is afoot, assuming job growth and GDP are accelerating, as well.