Despite what you read, see or hear, it will not be the end of the world.

The need to obsess

obsessed investor

For some reason the market and its participants cannot be happy even when “everything’s coming up roses and daffodils.” This is especially true when it involves the media and punditry corps who make their living by keeping you fearful and engaged. For as long as I’ve been watching (a few more decades than I care to mention) the aphorism ‘bad news sells’ seems to never fail as a predictor of human nature. Contrary to all the evidence of the stock market being a great wealth-generating engine in the long run, most investors constantly find themselves constantly obsessing about the minutia of the short term.

Shifting Obsessions

How To Consistency Beat the Market With Over a 90% Success Rate

Whether the market is up, down, or sideways, the Option Strategies Insider membership gives traders the power to consistently beat any market. Spend less than one hour a week and do the same.

Just click the link below to see our full presentation on exactly how we do it.

CLICK HERE TO JOIN OUR FREE WEBINAR

It looks to me like the market’s obsession with Covid19, however strong the current surge in the virus has been, is becoming old news. We have moved to new index all-time-highs as we’ve gotten to know the beast. It is formidable but there appears to be a light at the end of the tunnel, a vaccine that may be able to put a parenthesis around the outbreak. Not only is there a current, apparently efficacious vaccine but there are many other candidates and therapeutics in the works. Also, if we’d all use common sense, mask up, social distance and avoid close contact situations we could make a substantial reduction in new cases on our own. So, what is the new bull market killer… the obsession waiting on deck?

In my humble opinion, INTEREST RATES!

I have not seen or heard much about this topic, mainly because rates have remained so low, running between 60 and 70 basis pts over the past couple of months on the 10 year US Treasury note. However, with the news on the vaccine and the spike in the stock market that note hit 98 basis points in yield Tuesday November 10. This is up from 38 bps March 3, when everybody was flocking toward these securities for safety and a recent low August 3, of 51 bps. (10-Year Treasury yield history)

If the news on the vaccine and therapeutic front continues favorable my sense is that appetite for risk will bring more bond sellers into the market putting further upward pressure on yields. There will not be much the Fed can do to stop it. Rates will go up. The media will obsess. Investors will obsess. When will the spike in rates derail the market? The bears will be ecstatic and the market will continue to advance and no one will be able to understand why the market continues to rally in the face of higher rates. This should not cause fear and despair as it will be a sign of a return to a stronger, safer economy but, trust me, it will. The media and the so-called pros that they rely on for learned commentary will make it so.

‘Everybody knows higher rates will kill stocks’

Not so fast… this might be true under certain certain circumstances but not necessarily the current situation, unless you happen to be involved in the high multiple, tech-heavy leadership of the past seven months. You take rates on the ten-year back to nearly 2%, a level that prevailed in December of 2019, and those stocks are going to get hurt. In the meantime, all those cyclical, value and small cap stocks the were destroyed by the fear of a covid-prolonged economic collapse could really benefit.

The current total market capitalization of all the stocks in the Russell 2000 is about $2.5 trillion. The top 4 market cap stocks in the S&P 500 (AAPL, MSFT, AMZN and GOOGL), just the top 4, have a combined market cap nearly $6 trillion. The S&P 500 index in total has a market capitalization of $23 trillion. If there is a rotation out of large cap growth to small cap and value it would not take too much a shift (plus new money coming into the market) to garner a huge positive change in the Russell.

But, higher rates will kill stocks. Won’t they?

History would indicate that is not necessarily correct. In the 8 years between 1975 and 1982 the Dow Jones Industrials moved from a low of 632.04 to 1043.34. During that same period the rate on the 10-year Treasury jumped from 7.43% to high in 1981 of 15.05% finishing the period at 10.57%. Why this performance? Earnings were growing from $7.71 on the index in 1975 to $13.82, almost 80% over the period. The high interest rates were a result of hyper inflation. However, that curse had a silver lining. Corporations, unlike today, had pricing power.

Anecdotally, I bought a house in 1980 with an 11% adjustable rate mortgage. We (the country and my family) survived it. I should also point out the Dow Jones Industrials,1043.34 at the end of my example, closed Friday November 13, at 29,479.81.

Bottom Line

If this market continues to plow ahead it is likely to draw money out of bonds. Ergo, rates will be going up and it is likely in a Biden administration the Fed (which may be ineffective in this circumstance) will not have the White House bludgeoning them daily to keep rates at zero. The media and pundits will be screaming ‘look out below’. Certainly it may effect the market negatively for a while. We could easily see a 2% or 3% yielding treasury. Obviously this could hurt the high multiple end of the market but for most stocks it will be a welcome sign that things are getting better… the secular bull market continues.

What’s your take?

Original Post

Editor’s Note: The summary bullets for this article were added by Seeking Alpha editors.