Time to focus on the threat of higher rates

Stocks fell and interest rates popped higher following Friday’s U.S. jobs report.

Aside from the immediate reaction, it is time for investors to focus on the threat of higher rates to their wealth. For some time, I have communicated the dangers to investors of taking a casual approach to what I think is a slow, gradual, but generational turning point in the markets, driven by yields which remain suppressed seven years after the financial crisis. Here is my take on the next stage of this shift in how markets behave and investors react.

So many times when stocks have rallied, the excuse de jour is “rates will stay low, so everyone is happy.” So, shouldn’t we expect the opposite to be true? That is, when rates start to move higher in earnest (i.e. beyond the many short, sharp unsustainable moves of the past several years), it should induce some fear in the stock market. And while this is all short-term noise for now, the fact is that we are in a six-year bull market for stocks but much more significantly, a 35-year bull market for bonds! So any prick of the bond bubble will unnerve many investors.

As for today’s market activity, the initial reaction is typically bond rates up, high-yield stocks down. That’s what happened today. Very often, the stock market reacts to a whiff of higher rates by temporarily treating high-yield stocks like they were bonds. It is often a short-term phenomenon, lasting days/weeks. For some higher-yield energy stocks, this is a double-whammy since they are dealing with continued oil price volatility and the bond-surrogate tag.

Market Watch

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