Tuesday was a tough session for the market after the Dow rallied for eight consecutive sessions. There was never a sense of desperation, but it was clear the market grappled for leadership in the wake of better-than-expected news.
The market stumbled on a combination of higher Treasury yields and a stronger dollar. For all those folks that are always shocked and outraged whenever there is the talk of a competitive dollar, get ready to have a lot of pride, but expect less return from your blue-chip holdings.
Multinational companies get almost all their earnings growth from sales outside the United States, which is why we want more open markets. It’s also why we shouldn’t be rooting for a currency that’s too strong against the currencies of our trading rivals.
I don’t think the level is high enough to warrant changes to portfolios, but it’s clear that dollar-sensitive stocks such as Caterpillar (CAT) took it on the chin yesterday.
Ten-Year Yield Drama to 3%
Bond yields were surging yesterday; and yet, the reaction was subdued compared to the run-up to 3% on the ten-year yield. While the move to this point has been like a three-act play, some folks think there is a ghost in the machine element.
Run-Up
On February 2nd, the ten-year yield soared 7.9 basis points to 2.852, sending the Dow off 666 points. The yield reached its highest level since January 2014, up 19.1 basis points for the week.
Moment of Truth
On April 24th, the ten-year Treasury yield hit 3.0%, and the Dow Jones Industrial Average responded with a 424-point decline.
New Reality
Yesterday, the ten-year yield rallied to a high of 3.095, its highest level since July 2011; the Dow stumbled, but finished off the lows, down 193 points by the closing bell.
Using the peak going back to 1985, the ten-year yield has finally broken the uptrend line - a move that conventional wisdom held over the last couple of months would have been the death-knell for stocks.
The biggest losers in the session were utilities and real estate, which lost its luster to high-dividend payers to more stable bonds with competing yields.
The big question is which sectors or industries continue to look attractive in a higher-bond yield environment.
I love the action in semiconductors, building materials, chemical, and retail names.
S&P 500 Index | -0.68% |
Consumer Discretionary (XLY) | -0.58% |
Consumer Staples (XLP) | -0.38% |
Energy (XLE) | -0.06% |
Financials (XLF) | -0.21% |
Health Care (XLV) | -1.29% |
Industrials (XLI) | -0.40% |
Materials (XLB) | -0.30% |
Real Estate (XLRE) | -1.69% |
Technology (XLK) | -0.94% |
Utilities (XLU) | -0.84% |
As for the bond yields being higher, there are additional benefits as our Senior Research Analyst Willie Walker pointed out to me last night: “This move will bring a lot of hidden money into the economy. All that cash stashed under mattresses can now seek a return.”
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