Investment Insights: Above The Line
By Michael Kassab, CFA Chief Investment Officer
When it comes to birthdays, as my great-uncle likes to say, age is just another number. But, as we all learn along the way, some numbers – especially those round ones – just feel more important than others.
The same is true for the markets. Right now investors have a watchful eye on two numbers. The first is 3.0%, which the 10-year U.S. Treasury Bond now yields for the first time since 2014. We seemed headed that way earlier this year when wage inflation fears first appeared. The 10-year yield climbed all the way to 2.95% by late February before retreating, as equities sold off and a “return to safety” trade pushed assets back into bonds. Yields declined as a result.
Here we are two months later, and the 10-year U.S. Treasury yield has finally reached 3.0%, albeit with much less fanfare this time around. This latest upswing in rates snuck up on many investors, as most eyes were fixated on corporate earnings reports the past week. At any rate, it seems this “big event” has turned into a “non-event” for the markets.
The muted reaction in stocks makes sense to us. After all, as history has shown, so long as higher interest rates are the result of stronger economic growth, equities should be able to withstand such a move – up to a certain point, at least. We are in the camp that believes a 3.0% yield on the 10-year U.S. Treasury is a vote of confidence for further economic expansion. So, with that level now tested, Wall Street has seemingly moved on to 3.5% as the next focal point for yields.
The second key number for investors is the 200-day moving average for the S&P 500 Index, which was at 2609 as of April 25th. While this may feel like an arbitrary number, the reality is that many analysts consider it an important technical level to help determine the future direction of the stock market.
We have tested the 200-day moving average on at least three occasions thus far in 2018. Each time we have bounced back to stay above the trend line. Again, this makes sense to us. The market has had to deal with its fair share of concerns the past several months (i.e. rising inflation, potential trade wars, geopolitical tensions). However, we believe that the economic and corporate earnings backdrop remains solid enough to keep equity prices above this important technical level, while we gather enough steam for a move higher later in the year.