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If you are a regular reader of my Money and Markets columns, you know that I’m a big believer in three things:
One, Occam’s Razor, which is a principle that was introduced to me by the investment great John Bogle. First stated by a 14th century philosopher, the principle says: “The simpler the solution, the more likely it is to be correct.”
Two, the yield on the benchmark 10-year U.S. Treasury is the perfect predictor that will signal the direction of the stock market. It’s really the only indicator that you need to follow to tip you off about whether the market is going up, down or sideways.
That’s because this top-of-the-food-chain interest rate is the key for pricing assets across the board. It sets the prices that investors are willing to pay for everything, ranging from bonds to stocks to commodities to real estate …Â it will even tell you the direction of the global economy.
I know it’s hard to believe, but it’s really the only number you need to know to protect and grow your portfolio in the current environment.
Three, the yield on the 10-year U.S. Treasury is headed down and consequently stocks in the U.S. are headed down, too. I was spot-on in my March 17, Money and Markets article, when I predicted that intermediate and long-term rates were headed lower, despite the Federal Reserve hiking the discount rate on the short-end of the yield curve.
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And right on cue, U.S. stocks began to fall in tandem with interest rates — with the Dow Jones Industrial Average declining from its record level of about 21,100 to its current level of about 20,550. And currently, I’m expecting stocks to decline even further.
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| If you follow the correct interest rates, you’ll always know what’s coming up ahead in the markets. |
Following along with these three key points caused George B. — a regular reader of my articles — Â to send me the following question. I am publishing it here so that others can benefit from George’s excellent query and my response.
Question: I seem to remember several posts ago you gave some parameters on the 10-year versus the direction of the stock market. As an example, if the 10-year goes below 2.4%, the market is in a downtrend and if it goes above 2.6%, it is in an uptrend. Am I remembering this correctly? And if so, is this still good advice? Thanks, George.
Answer: Great question, George. I currently see 10-year U.S. Treasury rates falling into these three ranges:
- More than 2.7%: If the 10-year shoots up above 2.7%, the Trump-reflation trade is on and stocks are headed higher. Much higher!
- 2.3% to 2.7%: Should the 10-year stay in this range, stocks will also be range-bound between 19,500 and 21,500 on the Dow. That’s a stock trading range of about plus/minus 10 percent.
- Less than 2.3%: If the 10-year falls below 2.3%, it’s “look out below” for stocks worldwide. And we may finally get that long-overdue stock market correction of 20 percent or more that many have been expecting.
There’s a lot of powerful information for your portfolio in this thumbnail summary of interest-rate levels. Keep it handy and use it as your guide when making buy, sell and hold decisions for your nest egg.
As for me — as the editor of Weiss’s flagship publication, the Safe Money Report — I have the hedges on in the Safe Money Portfolio because I expect interest rates to go lower, possibly dramatically lower.
Why?
First, we are in a slow-growth world because of a massive global debt overhang. I expect real U.S. GDP growth of about 2 percent for 2017 and 2018 as the global economy continues to battle deflationary pressures. For more on the huge debt dilemma, click here.
Second, there are tons of geopolitical risk currently in the system and with an unconventional president running the show here in the U.S., there’s plenty of opportunity for a potential surprise.
In the financial markets, surprises mean volatility. And currently, the chances for a downside surprise are high as we are operating in a rapidly changing world. For more on the upcoming geopolitical calendar, click here.
Yes, as profit-seeking investors, it’s important to accept the fact that we are operating in a new and unconventional world.
That’s why, next week, I’ll shift my focus from the recent run of macroeconomic commentary and share with you a cutting-edge, functional and proprietary asset-allocation model that I created and that I am using for my ultra-wealthy clients.
Best wishes,
Bill Hall
P.S. My Safe Money Report’s primary mission is to provide you with the 100% independent research and analysis you need to help preserve — and grow — your wealth in both rising and falling markets. Read more here …
Bill Hall is the editor of the Safe Money Report. He is a Certified Public Accountant (CPA), Chartered Financial Analyst (CFA) and Certified Financial Planner (CFP). Besides his editorial duties with Weiss Research, Bill is the managing director of Plimsoll Mark Capital, a firm that provides financial, tax and investment advice to wealthy families all over the world.
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Thank you for sharing my question with your readers and if we take your direction on the 10 years we will be wiser and richer in the future. We will be traveling out of our wonderful country the next 3 weeks but be assured these benchmarks will be in my suitcase. Thanks and Happy Easter
Bill, I agree rates are going down. But I think you need to tend to what I think is a typo in your three ranges. Number 2 is listed as “3% to 2.7%” which makes it contradictory with Number 1.
I believe you meant for the second range (and wrote but it was not entered correctly): “2.3% to 2.7%” which makes perfect sense.
Have a great Easter! W.R.
What is a good ticker symbol for ten year rates, or an ETF proxy?
Thanks
IEF – TYBS are ballpark…and depend on your direction.
Also TYNS.
I get the daily 30-year, 10-year, and 2-year yields at CNBC.com, using the following tickers: US30Y, US10Y, and US2Y. I chart them daily.
Since the yield on the 10 yr US treasury bond is so telling for the direction of the US stock market and maybe others, should it and its direction not be listed on the daily stock market indexes you publish with each daily article Weiss publishes? Thanks
In the meantime, you might use: https://ycharts.com/indicators/10_year_treasury_rate
Bill, Like you, as I said above, I see lower yields ahead. But I have compared the 10 year Treasury yield charts with the S&P 500 charts in several time frames and find almost no correlation between the two. I cannot find any predictability value in the 10 year yields and wonder how you came up with your three zones?
We are presently still in a world of falsified interest rates as the result of actions carried out by the FED to push rates down and hold them too low for too long. This is a major historical change from the past that affects evaluations based on past performance unreliable to my way of thinking. Is this taken into consideration in the three rate ranges you mention?
Nothing has changed since QE. NIRP is still the default policy, as much as savers and true investors hate speculation, it’s all the same stuff we’ve seen since late 2012. The government can’t pay its obligations to the people when rates are elevated, so it reneges on those obligations and on the Treasuries themselves, and the rates drop. The population doesn’t want to see government programs disappear all together, but they also want to quit paying for the mistakes of a drug addled spending junkie that robs their earnings by taxation, and then throws that money out the window giving nothing in return. And now businesses are valued outrageously in comparison to the standard that Americans used to hold businesses to all because the government is on the brink of sudden death. So blue chip businesses don’t even have to compete anymore, they can perform like garbage, and they get a pass because there is no one left on the horizon to lead the country.
Doesn’t lower rates means people buy dividend stocks?
Exactly what I thought, Dee. Lower T Bond rates should drive money into Equities no?? Plus the 10 yr. Treasury is now at 2.26 % ( below 2.3%) so is the author saying stocks will now fall? I’m confused.
The yield is heading below 2 yet stocks are rallying….in complete contradiction to your article. Would love some commentary on this….