Equity Investors Pulling Back due to Interest Rate Fears
Is the Bull Market Coming Un-done?
Headline-writing in the financial press, especially on web sites, must surely be a frustrating profession. Quite often, as soon as they crank out a great eye-catcher that captures and summarizes their findings about the reason why stocks are soaring, or tanking, the market then turns in the other direction, forcing the writer back to the phones to develop a replacement headline.
The February 2015 upward movement of bond market interest yields was certainly an indicator that the supply of/demand for bonds was creating a new scenario that has rarely been seen since mid-2008. And predictably, stock market players came to be spooked, though not likely surprised by that interest-rate turn. Why is that? The daily trading of common stocks is strongly tied to the current yield on 10-years-to-maturity government notes. So, if the 10-year yield has risen this week, most stocks in the market will typically trade at a lower price today than last week.*
Conclusion: Always keep an eye on changes in the 10-year Treasury yield; the flip side of those changes typically translates into broad equity price movements, within a few trading days.
*Equity traders value and re-value their stock lists at least daily; the most widely used method for arriving at fair value of a stock is to forecast that company’s bottom line for a number of future years and then discount those forecasts to their present value. The discount rate used to produce present value is a key variable. By convention, most equity analysts use the current 10-year Treasury yield as the discount rate in their models. (They don’t all arrive at the same value for a given company’s stock, primarily because they each estimate different future earnings.)
