The stock market has a 'real' problem: Morning Brief
Stocks are facing a "real" yield problem as investors become more focused on rising real yields, which could result in lower stock prices and a hit to the P/E multiple.
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Posted 8/22/2023, 10:00:27 AM
yahoo.com
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The stock market is being negatively impacted by intense competition and a real yield problem.
Stocks finished lower for a third day due to higher yields, with all three major U.S. indexes ending in the red.
Surging U.S. Treasury yields are causing concern among investors as they wonder how much it will impact the rally in stocks and speculative assets, with the S&P 500, technology sector, bitcoin, and high-growth names all experiencing losses; rising rates are making it more difficult for borrowers and increasing the appeal of risk-free Treasury yields.
A stock market rally is expected in the near term, as recent market corrections have created potential opportunities for investors to increase equity exposure, despite the possibility of a 5-10% correction still lingering. Additionally, analysis suggests that sectors such as Utilities, Staples, Real Estate, Financials, and Bonds, which have underperformed in 2023, could present decent upside potential in 2024, particularly if there is a Federal Reserve rate-cutting cycle.
Investors are turning to high-yield cash alternatives, such as savings accounts and bonds, which offer returns of over 5% and are outperforming the S&P 500, prompting some to reconsider their exposure to the stock market's volatility.
Stocks are giving back their gains as bond yields rise due to fears that the Federal Reserve will keep interest rates high for a longer period of time.
The recent sell-off in US bonds has led to a rise in the yield-to-duration ratio, indicating that yields would need to increase significantly to generate losses, providing a potential floor for the struggling market.
Tech stocks may face challenges in the second half of the year despite recent inflows, as central bank liquidity decreases and investors shift from equities to bonds.
Tech stocks are exhibiting sell signals similar to previous market turning points, with valuations reaching unsustainable levels, a yield curve inversion indicating trouble ahead, and government funding and inflationary expectations creating economic challenges for long-duration assets.
Despite the appearance of a "Goldilocks" economy, with falling inflation and strong economic growth, rising yields on American government bonds are posing a threat to financial stability, particularly in the commercial property market, where owners may face financial distress due to a combination of rising interest rates and remote work practices. This situation could also impact other sectors and lenders exposed to commercial real estate.
Technology stocks appear to be defying the impact of higher interest rates and are continuing to perform strongly.
Treasury yields are on the move and investors should pay attention to where they might be headed next.
The top 25 stocks in the S&P 500 outperformed the index in the 35th week of 2023, with tech stocks leading the way, suggesting a return of bull markets and a decrease in recessionary fears; however, market health, the balance between developed and emerging markets, and investor behavior still need to be addressed. Additionally, market correlations have dropped since COVID, and on "down-market" days, correlations are 5% higher than on "up-market" days. Market correlations also decrease during upward economic cycles. Retail investors are showing a preference for dividend-driven investing and investing in AI stocks. The global subsidies race is impacting valuations in tech and leading to supply chain inefficiencies. As a result, there are opportunities for diversification and investment in a wide variety of equities and bonds.
Investing in Realty Income Corporation (NYSE:O) may not be rational from a fundamental level due to its relatively unattractive dividend yield and the potential damage caused by a higher interest rate environment.
U.S. stock futures decline as bond yields rise despite weak economic news from China and Europe.
Analysts at BMO and UBS predict that the yield on the 10-year Treasury will surpass the S&P 500 earnings yield, indicating a potential fall in stocks and a rise in bond prices.
Rising bond yields and interest rates are a concern for CNBC's Jim Cramer, who believes that the market will struggle to advance if rates continue to climb.
Realty Income's shares have hit a one-year low, but the REIT's strong operating performance, dividend coverage, and diverse real estate portfolio make it an attractive investment with a 5.6% dividend yield.
Treasury yields rise and stocks fall as traders anticipate longer-lasting higher rates to prevent inflation, while Brent oil briefly surpasses $95 a barrel; the Federal Reserve's decision on interest rates is eagerly awaited by investors.
High-yield bonds outperforming relative to corporate bonds suggests a risk-on environment for stocks, according to a bullish signal in the bond market.