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Why 3 is the Loneliest Number for the Stock Market


Apr. 25 2018, Updated 5:16 p.m. ET

Is a 3% yield on the 10 year Treasury that big a deal?

Simple.  Yes and No.  The actual round number of 3% of course means nothing special to the economy.  But rates moving to 3% does have several implications.

First – We moved really fast from 2.83% on April 17 to now.  That means the market was likely behind in inflation assumptions.  And a quick move can be a bit jarring to sensitive markets like mortgage and commercial loans.

Second – The stock market now has competition for yield (TBT) (TLT).  As of today, the dividend yield of the S&P 500 (SPY) is 1.65%.  Obviously when the treasury yield was 2.8%, THAT was clearly higher than the yield of the “market” as well.  So why is 3% a bigger deal?  It may not really be enough of a spread to cause a switch from stocks to bonds, but psychologically it may be an excuse.  Look at poor 3m (MMM) today.  Its yield is still a solid 2.75% – sounds competitive with treasuries, right?  Except that 3M is now down 16% year-to-date!  So you can go with a “riskless” (we know there is some risk) treasury yielding 3% or a (clearly highly) risky equity like 3M.  Obviously there are better and worse examples than 3M, but it highlights how some investors may just shift out of risk.

Third – This related to the above point, but different.  The stock market is a discounting mechanism.  And when long term rates go up, future cash is worth less.  So technically, the market should be a bit cheaper when rates rise that quickly.

Net-net: 3% ain’t nothin’ but a number.  But that number does have some consequences.  If rates settle in at a new higher range, but don’t shoot up, and the economy continues to grow, the market will still give you some opportunities.  Patience, grasshopper.

-JP Gravitt

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