Why Stock Investors Shouldn’t Worry About 10-year Treasury Yield Ruining 2024 Rally Yet

The 10-year Treasury yield has stayed above 4% for two consecutive days, but this level still seems insufficient to slow down the momentum of the 2024 U.S. stock market rally. Several factors contribute to this, starting with the view that the yield's rise above 4% might not last long, according to technical strategists and other market participants.

‍

The recent selloff in long-term U.S. government bonds on Monday and Tuesday was likely a result of profit-taking, and many believe it won't disrupt the ongoing trend of rising bond prices and falling yields that started in late July and continued through August. Eric Diton, president and managing director of The Wealth Alliance, a New York-based investment advisory firm that manages about $1.8 billion, shared this perspective. He suggested that the recent moves were likely temporary and wouldn't alter the overall direction of the bond market.

‍

Diton argued that the 10-year yield would need to rise above 4.5% in response to some unforeseen event to truly affect stock market valuations. However, he doesn’t believe such a scenario is likely. Furthermore, he noted that the Federal Reserve is expected to continue lowering interest rates because the current federal funds rate target of 4.75% to 5% is too high, especially when compared to August's year-over-year inflation rate of 2.5%. Diton believes the Fed's target rate should be between 3.5% and 4% under current conditions.

‍

The 10-year yield has struggled to close above 4% consistently since July, and there is another reason why it may face difficulties moving forward: technical factors. Adam Turnquist, chief technical strategist at LPL Financial, pointed out that the 10-year yield, which finished at 4.034% after reaching an intraday high close to 4.06%, remains below key resistance levels. These include a resistance point at 4.09% and another near its 200-day moving average of 4.16%. According to Turnquist, until these resistance levels are surpassed, any rally in yields is likely to be short-lived.

‍

Turnquist added that equity markets have largely “shrugged off” the recent rebound in yields. This is largely due to rising confidence in a “soft landing” for the economy, which was bolstered by the surprisingly strong jobs report from September, released the previous Friday. A soft landing refers to the scenario in which the economy slows down enough to reduce inflation but avoids a full-blown recession.

‍

Still, Turnquist warned that it’s not just about where yields end up, but how fast they move. A sharp increase in yields could become problematic for stocks as they adjust to higher rates. However, for the moment, the stock market seems comfortable with a stable fixed-income market, particularly when credit spreads remain narrow, indicating relatively low financial stress.

‍

On Tuesday, all three major U.S. stock indexes finished higher despite the rise in long-term yields, which hit their highest levels in over two months. The Nasdaq Composite led the gains with a 1.5% rise, while the Dow Jones Industrial Average (DJIA) and the S&P 500 also posted smaller gains.

‍

Eric Diton of The Wealth Alliance explained that the stock market thrives on slow, steady economic growth combined with low inflation, which is exactly what the current environment looks like. He pointed out that, heading into Thursday’s release of September’s consumer price index (CPI), the market seems content with the present conditions.

‍

However, Diton cautioned that economic data can be unpredictable from one month to the next, making the path forward somewhat uncertain. “It’s always going to be a bumpy road,” he noted, referring to both the stock and bond markets. He emphasized that nothing in financial markets moves in a straight line, and investors should expect periods of volatility.

‍

This sentiment underscores a broader understanding that while the market may be enjoying relatively calm waters at the moment, unexpected data or shifts in economic conditions could quickly change the landscape. The recent fluctuations in Treasury yields are a reminder that the bond and stock markets are both sensitive to changes in interest rates and economic indicators.

‍

In summary, while the 10-year Treasury yield remains above 4%, it has yet to reach levels that would significantly impact the ongoing stock market rally. Market participants expect yields to stay below key technical resistance levels unless an unforeseen event disrupts the current trend. For now, investors remain optimistic about a soft economic landing and are encouraged by the combination of slow growth and low inflation, even as they remain cautious about the unpredictability of future economic data.

‍