Cut through the horror stories of traders trying to frighten each other and guess what? While 10-year bond yields have climbed 4% in the past week to the highest levels since 2007, the S&P 500 and NASDAQ have moved forward as well. I challenge anyone who says that stocks automatically suffer when yields rise to explain that one.
They can’t. Because what’s really happening defies the easy logic that’s been driving the bears in the last few months. And today, investors decided they’d rather open up to a future that contains opportunities as well as threats, potential as well as pitfalls.
You can see that existential decision play out across the market. If the world was truly ending, I doubt that my favorite growth names would be up 2.6% in the aggregate today, wiping out all the accumulated dread from earlier in the week and then some. The trigger is clear: the economy still running hot enough to keep a lot of people working. As I keep hearing, it’s hard to say we’re in an apocalyptic recession when businesses still have the resources and the will to actively hire instead of laying off workers.
And since a strong job market gives the Fed more room to keep interest rates at theoretically restrictive levels for a longer period of time, the news pulled money out of long-term bonds that just can’t compete with shorter-term Treasury debt or even money market funds. Remember, when demand for any investment weakens, prices go down. When bond prices go down, the coupon payment doesn’t change, but people who buy at a discount can lock in a higher effective yield.
Where the bears got the upper rhetorical hand is that at a certain point, bond prices get so low that those effective yields become attractive, draining money out of the stock market as investors decide it’s better to lock in a reasonable level of income than take their chances in an unpredictable and sometimes harrowing environment. OK. But nobody is finding Treasury debt attractive right now. It’s going to take time for people to decide that they can live with earning 4-5% a year for the next decade.
What we saw today was Wall Street weighing that reliable, fixed return and then deciding it’s better to take a chance on stocks instead. Goldilocks investors don’t like it too hot or too cold, but being too hot is better than feeling the freeze. Too many people earning paychecks is still preferable to too many people getting pink slips.
Of course stocks are always unpredictable. The wrong company can implode and even the right one can take years to mature. But when they do well, they make shareholders a whole lot more money than 4-5% a year. Even in our humble world, growth stocks throughout history have climbed at an annualized rate of 18.57% across bull and bear markets, boom and bust.
I would never promise that number (to be honest, I still consider it a little low as we recover from last year) but anything in that ball park is a whole lot better than locking in 13-14% lower returns every year.
Do the math on that. Start with $100 and buy Treasury bonds today, then take another $100 and buy into our stocks. At the end of 10 years, the bonds will mature and you’ll rack up about $47 in interest with very little risk. Great. Assuming inflation doesn’t eat you alive in the meantime, that’s a smooth ride.
If future GameChangers perform anything like they have in the past decade, I suspect the stock portfolio will end up with a lot more than $47 to show for itself. Admittedly the ride in between will be volatile. Sometimes it might get scary. And some of our best bets will lose money. But over time, the winners truly do outnumber and outperform the losers.
That’s the joy of stocks. American companies aren’t passive contracts between you and the government that you’ll get your money back plus interest. They’re organic entities steered by some of the smartest people around. They plan. They execute. When the world throws them a curve, they pivot and get back to work.
And they grow. When the economy is growing, it means these companies are growing. When people are getting hired, it means these companies are doing so much business that they need more people . . . and that they have the cash flow and the confidence to do so.
That’s what we learned today. U.S. companies have the confidence and the cash flow to keep hiring. They aren’t laying people off in mass numbers. Maybe that’s coming, but for now, interest rates at these levels aren’t pushing a lot of big corporations over a cliff.
We’ll know more as earnings season really gets rolling next Friday. Expectations are actually pretty good. The S&P 500 might finally end its pattern of year-over-year decline and signal that the current quarter brings a return to year-over-year growth. In that scenario, arguments for selling stocks quickly shift to a hold or even a buy signal.
After all, when a company is growing, the stock needs to become more valuable to reflect that you’re getting a stake in a larger enterprise. That’s just how stocks work. Not every company grows, but the ones that are expanding create a sense of urgency: if you don’t buy them when they’re small, you’ll need to pay extra for them when they’re bigger.
That’s what I think Wall Street woke up and saw today. Let the Fed rage. Interest rates are what they are. We’ve seen that the economy can handle the current weight and probably a little more before the job market even flinches. All these are known factors.
What’s unknown and underappreciated is the upside. We’ve always been on the side of the future being bigger and brighter than the past or even the present, because that’s how our companies work. We buy small and fast. We sell when they’re bigger.
Now earnings season is coming. It could be a bumpy couple of weeks until the numbers stack up. But if today is any indication, our numbers will be good and investors are in the mood to see them for what they are. The bond market doesn’t always call the tune. We saw that today.