Chart Talk {11.06.17}

One question that I'm frequently asked is when will rising interest rates crimp stock prices? My answer to that is someday but probably not too soon.  Take a look at the chart above and I'll explain my reasoning.  

The above chart comes to us via Tradingview.com although the annotations are mine.  It is a yield chart of the US 10-year treasury bond which as of this writing yields 2.32%.  Now if you look in relation to last year, specifically the summer of 2016, interest rates have climbed substantially.  They are up nearly a full percentage point.  However, for most of the last year 10-year rates have been locked in a range of roughly 2-2.50% on this bond.  Currently we are trading around the mid-point of that range.  Since many other interest paying vehicles price off of this bond then it is very probable that rates have to rise higher than where we're trading now in order to become competitive with stocks.  

My guess and the number I've been using for quite some time is that we need to see rates above 3% on the 10-year before bonds become more competitive to stocks.  At a 3% yield other interest rate investments would most likely see 4-5% plus payouts.  A 5% yield, particularly in a tax deferred account like an IRA, starts to become pretty competitive with the longer term likely return on stocks over the next few years.  We're along way from 3%.  The yield chart above of the 10-year doesn't even show that number off to the left. 

Someday bond yields may again become competitive to stocks but I think we're a long way from that.  I'll worry about other things first.

Back Wednesday.