The realization of higher interest rates was a major reason as to why tech stocks pulled back yesterday.  Financials and energy however were higher on greater conviction of stronger growth that will ignite faster inflation.

It appears that almost overnight there is near uniformity that the largest capitalized growth stocks are vastly over owned with valuations stretched beyond realistic expectations based upon rising inflationary expectations.  The question at hand is this a temporary phenomenon or a major change in outlook?

UBS commented “inflation is about to rewrite the stock market playbook, a playbook that was anchored upon a 40-year decline in interest rates.”   UBS was yet another bulge bracket firm questioning the popular 60% stock/40% bond portfolio, stating that such could produce a negative or no return for the next decade.

How will this unfold? According to the Federal Reserve a record 53% of Americans are involved in the markets, eclipsing the 2000 record of 51%, primarily via 401-Ks.   The Fed states only 15% of Americans own individual stocks and only 27% of individuals rely upon a broker, down from over 90% 30 years ago.

Only a few market participants have experienced a rising rate environment thus suggesting volatility can significantly rise.

Many times, I have commented about market imbalances as a record five companies comprise approximately 24%-25% of the S & P capitalization.  This is down from 27% several weeks ago but it still at historic proportions.

What happens if interest rates double, defined as the ten-year Treasury rising to 2.6% or to around March 2019 levels?  Bloomberg analytics states that is if this were to occur, this pivotal benchmark will have a negative annual return of 23.65%.  One would have to hold the 10-year until late 2028 to breakeven.

If the 10-year doubles in yield—the major global benchmark–the selloff in other bonds would be gargantuan given the lack of liquidity.  Bloomberg wrote yesterday “ETF bond funds across the board spectrum are bleeding assets as investors brace for higher inflation.”

There are no stories of the market’s inability to handle such selling, perhaps the result of Fed programs instituted last March.  With this written however, bids are weakening at a pace that I have not experienced in a year.

Returning back to equities, if the 10-year doubles or triple in yield, how will mega sized growth issues respond? Will 2000-2005 be repeated as the NASDAQ plunged almost 80% in 18 months or will it be just the run of the mill bear market with values declining 35%? I have no idea but all must remember everything can either rise or decline by a measure ever thought possible.

What will happen today?

Last night the foreign markets were mixed.  London was down 0.20%, Paris up 0.02% and Frankfurt down 0.93%.  China was down 0.17%, Japan up 0.46% and Hang Seng up 1.03%.

The Dow should open quiet.  NASDAQ futures are off another 1.7%, Bitcoin is down another 16% and oil up another 1.0%.   The 10-year is up 1/32 to yield 1.36%.


The views expressed herein are those of Kent Engelke and do not necessarily reflect those of Capitol Securities Management. The information contained herein has been compiled from sources believed to be reliable; however, there is no guarantee of its accuracy or completeness. Any opinions expressed are statements of judgment on this date and are subject to certain risks and uncertainties which could cause actual results to differ materially from those currently anticipated or projected. Any future dividends, interest, yields and event dates listed may be subject to change. An investor cannot invest in an index, and its returns are not indicative of the performance of any specific investment. Past performance is not indicative of future results. The material provided in Daily Market Commentaries or on this website should be used for informational purposes only and in no way should be relied upon for financial advice. Please be sure to consult your own financial advisor when making decisions regarding your financial management. Members of FINRA and SIPC, Capitol Securities Management is a privately owned full-service retail brokerage and investment advisory firm headquartered in Richmond, Virginia. For nearly 30 years, we have been serving the needs of our investors. Today, more than 200 Capitol Securities Management investment professionals and support staff serve approximately 18,000 customer accounts from Southern Florida to the New England coast.