Since early August this year when the S&P 500 peaked around 4,600 points, the U.S. 10 Year Treasury yield has increased from below 4.0% to around 4.8%.
US 10 Year Treasury Yield
Obviously with the U.S. 10 Year at record levels last seen in August 2007, the markets freaked out lately whenever inflation data came in hotter than expected that enforced the rhetoric that the Federal Reserve will hike one more time in 2023.
The last time the U.S. 10 Year Treasury topped 4.5% was in August 2007
Equity valuations are usually compared with a risk-free rate, where most analysts peg it to the U.S. 10 Year Treasury yield.
Yield Curve Un-Inversion Taking Place
T10Y2Y
The chart above shows the U.S. 10-year minus the U.S. 2-year, which currently sits at minus 30 basis points. Compared to early July, the difference was as large as minus 108 basis points. Previously, it is believed that when ever the yield curve is inverted, it usually is a precursor for a recession. Yield curve inversion refers to shorter term yields returning a higher yield compared to long term yield. In a normal environment, longer term bonds then to return a higher yield, as investors are exposed to more risk on a longer term bond.
T10Y3M
The above chart shows the U.S. 10 year minus the U.S. 3 month yield, currently sitting at minus 85 basis points. As compared to early June, the difference was minus 189 basis points.
Effect on the S&P 500
S&P 500 made a bullish candle on Friday Oct 6
The S&P 500 initially on Friday opened lower, as the market freaked out that nonfarm payrolls in September came in hotter than expected at 336k vs the consensus of 170k, vs August 227k. The U.S. September unemployment rate was 3.8%, higher than the expected of 3.7%, vs August 3.8%.
If you were a typical retail investor, you would have decided to sell your stocks as it looks like the market is collapsing. And then suddenly the market did a complete reversal and ended the day up 1.18%!
In fact, the CNN fear & greed index on October 5th before market open was in the extreme fear region.
Media painted doom & gloom on Tuesday October 3rd as Dow plunged 430 points, S&P 500 down 1.37%
Source: CNBC
Source: CNN
Source: Business Insider
In typical fashion, the media painted headlines on Tuesday October 3rd when the Dow Jones plunged 430 points (1.29%), the S&P 500 plunged 1.37%, & the Nasdaq Composite plunged 1.87%.
What wasn't mentioned was the level above 4,200 points coincided with the 200 day moving average, combined with 4,200 being a strong support level as it was previously a resistance level in February 2023.
Remember the market tends to shake out the weak hands, to scare retail investors to exit the market and then taking off without them. Even worse if you attempted to open a short position as you would find yourself trying to cover your shorts!
Never ever trust what the media says, instead focus on the price action and you will do fine.
$S&P 500(.SPX)$
Comments
I think the recent yield curve un-inversion is a positive development for the US economy.
The yield curve is just one indicator of economic health.
So Investors are becoming more optimistic about the future of the economy,