Treasuries rate hike ahead of Trump inauguration: Here’s how it could hurt the stock market, what to do
The stock market rallied after Donald Trump’s election, but now Treasury yields are rising as Inauguration Day nears.
Geopolitical fears, a more hawkish Fed and uncertainty surrounding the incoming Trump administration’s policies all weighed on indices. The Nasdaq Composite and S&P 500 are at recent highs.
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The most recent jobs report underscored that labor demand continues to strengthen. This has strengthened the case among central bankers who believe that the need for rate cuts by 2025 has diminished. That’s especially true when annual inflation remains stubbornly stuck at the 3% level.
There was a small rally in bonds following this week’s producer price index and consumer price index reports, along with a cooler-than-expected core CPI reading. As a result, the 10-year Treasury yield fell from 4.79% on January 13 to 4.62% on Thursday. However, this is higher than the low of 3.63 percent in September.
Treasury yields high before Trump’s inauguration
Nicholas Collas, founder of Datatrek Research, said in a note to clients that the 10-year yield is at current levels “rarely seen in the last 20 years”.
“The last time was in June-July 2007, in the early 2000s cycle,” he said. “Even if the US economy can handle a 5% 10-year yield, equity markets may not like to test that concept.”
The valuation has reached a level beyond the experience of the general stock market and financial experts.
According to Ipek Ozkardeskaya, senior analyst at Swiss Quotation Bank, good yields are essential if stocks are to perform well in the future.
“The stock market’s rally should extend beyond tech companies and the U.S., with declining yields and lower borrowing costs benefiting more cyclical and non-tech pockets of the market,” she said in a note to clients. If yields continue to rise and rise, the rally is unlikely to extend beyond the tech sector, and even within technology it may be reduced by the already high valuations.
Here’s how Trump’s tariff policy will affect the outcome
Several potential issues related to the incoming Trump administration are weighing on the market, Thomas Urano, associate chief investment officer at Sage Advisory, told Investor Business Daily.
“Expectations from the incoming administration’s policies are focused on tariffs and immigration, which have raised concerns about rising import costs and rising wage costs,” he said. “The looming political battle over tax cuts, fiscal spending and the debt ceiling has also put investors on edge. Further pressure on the deficit comes from concerns about increased TSY (Treasury securities) supply, which could help push yields higher.”
Urano believes that the current market volatility has resulted in higher yields. He said the market had sold at a premium. That should compensate investors for both inflation risk and increased price volatility at the long end of the yield curve.
Stock market investors should remember this
But Sam Stovall, CFRA’s chief investment strategist, says it’s key for investors not to let their emotions become the worst enemy of their portfolios.
“(Remember that the S&P 500 has fallen as much as 20% since (World War II) and it only took an average of four months to recover all that was lost,” he told IBD.
Sectors that could face negative impacts from higher prices include consumer demand and real estate, he said. Higher rates typically dampen consumers’ appetite for spending. Senior bond products offer an attractive, low-volatility alternative to real estate investment trusts and utilities.
“Remember, however, that gains from high-yielding stocks are taxed much less than bond interest, even though they are exposed to the attractiveness of bond yields,” Stovall added.
Please follow Michael Larkin on X @IBD_MLarkin More analysis of growth stocks.
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