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The 10-year Treasury yield is back at 5%, and Wall Street has reason to look over its shoulder. The last two visits came in October 2023 and July 2007. One was followed by a powerful stock rally. The other preceded a financial disaster. Same number. Very different endings.
Five percent isn't a crystal ball, but it changes the conversation. Treasuries offer stocks tougher competition for investors' money, while borrowing gets more expensive for homebuyers and businesses. Eventually, somebody feels the squeeze.
2023: Just When Investors Had Had Enough
By October 2023, investors were exhausted by inflation and the prospect of interest rates staying high. On October 23, the 10-year briefly pushed above 5%. By October 27, the S&P 500 was roughly 10% below its summer high. The market looked bruised, and there was plenty to worry about.
But that was close to the turning point. Inflation eased, investors began anticipating eventual Fed rate cuts, and yields retreated. The economy kept going. From its October 27 closing low through year-end, the S&P 500 rallied approximately 15.8%, excluding dividends. Investors who assumed 5% meant the worst was still ahead watched stocks take off.
2007: Stocks Climbed. Trouble Spread.
Rewind to July 20, 2007, the previous visit to 5%. The housing boom was unraveling, but after a turbulent summer, the S&P 500 reached a new peak that October. There was still time to believe the damage could be contained.
It couldn't. Mortgage losses spread, financial institutions buckled, and lending seized up. From its October 2007 peak to March 2009, the S&P 500 fell approximately 57%. The disaster unfolded over months as the financial crisis deepened; crossing 5% hadn't triggered an overnight collapse.
The Twist: Yields Fell Both Times
Falling yields accompanied the late-2023 rally as inflation fears eased. During the financial crisis, yields also fell, but investors were seeking safety while the economy deteriorated. Even seeing the 10-year retreat from 5% won't tell us everything. Why it's falling matters.
Maria's Bottom Line 2023 wasn't that long ago, but this market feels different. Look at what it's taking: war, $100 oil, and one unsettling headline after another. Yet it keeps finding its footing. That resilience means something. So am I supposed to believe a quarter-point rate hike or a 5% Treasury yield is suddenly going to knock it out? I'm not buying that. This market can pull back, but it's going to take more than a quarter point to convince me it's done. |
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