Wall Street unsettled by rising rates
NEW YORK – Yes, it’s possible to have too much of a good thing, and that’s exactly why stock markets around the world are getting so unsettled.
Optimism for an economic revival is surging following a year of coronavirus induced misery. But expectations for stronger growth — plus the higher inflation that could accompany it — are pushing interest rates higher, which is forcing investors to re-examine how they value stocks, bonds and every other investment.
When it tries to figure out the value for anything from Apple’s stock to a junk bond, the financial world starts by comparing it against a U.S. Treasury bond, which is what the government uses to borrow money.
For years, yields have been ultralow for Treasurys, meaning investors earned very little in interest for owning them.
That in turn helped make stocks and other investments more attractive, driving up their prices. But when Treasury yields rise, so does the downward pressure on prices for other investments.
All eyes have been on the yield of the 10-year Treasury note, which climbed above 1.50% this week after starting the year around 0.90%.
Here’s a look at why that move shook up the financial world, including the worst week for the Nasdaq composite since October:
Why are Treasury yields rising?
Part of it is rising expectations for inflation, perhaps the worst enemy of a bond investor.
Inflation means future payments from bonds won’t buy as many bananas, minutes’ worth of college tuition or whatever else is rising in price. So bond prices tend to fall when inflation expectations are rising, which in turn pushes up their yields.
Treasury yields also often track with expectations for the economy’s strength, which are on the rise. When the economy is healthy, investors feel less need to own Treasurys, considered to be the safest possible investment.
Why do falling bond prices mean rising yields?
Say I bought a bond for $100 that pays 1% in interest, but I’m worried about rising inflation and don’t want to be stuck with it. I sell it to you for $90.
You’re getting more than a 1% return on your investment, because the regular payouts coming from the bond will still be the same amount as when I owned it.
Why are inflation and growth expectations rising?
Coronavirus vaccines will hopefully get economies humming this year, as people feel comfortable returning to shops, businesses reopen and workers get jobs again.
The International Monetary Fund expects the global economy to grow 5.5% this year following last year’s 3.5% plunge.
A stronger economy often coincides with higher inflation, though it’s been generally trending downward for decades.
Congress is also close to pumping up to an additional $1.9 trillion into the U.S. economy, which could further boost growth and inflation.
Why do rates affect stock prices?
When trying to figure out what a stock’s price should be, investors often look at two things: how much cash the company will generate and how much to pay for each $1 of that cash. When interest rates are low and bonds are paying little, investors are willing to pay more for that second part. Consider a Big Tech company, which will likely keep generating large amounts of cash many years into the future. It’s more worthwhile to wait a long time for that if a 10-year Treasury is paying less in the meantime.
And now that rates are rising?
The recent rise in yields is forcing investors to pare back how much they’re willing to spend on each $1 of future company earnings. Stocks with the highest prices relative to earnings are getting hit hard, as are stocks that have been bid up for their expected profits far in the future. Big Tech stocks are in both those camps. Dividend-paying stocks also get hurt because investors looking for income can now turn instead to bonds, which are safer investments.
The ultimate worry is that inflation will take off at some point, sending rates much higher.
Aren’t interest rates still low?
Yes, even at 1.50%, the 10-year Treasury yield is still below the 2.60% level it was at two years ago or the 5% level of two decades ago.
“The concern isn’t that the 10-year is at 1.50%,” said Yung-Yu Ma, chief investment strategist at BMO Wealth Management. “It’s that it went from 1% to 1.50% in a handful of weeks, and what does that mean for the rest of 2021.”
Ma thinks it could keep rising above 2% by the end of the year, but he doesn’t see it going back to the old normal of 4% or 5%, which would force an even bigger reassessment for markets. Until that becomes more clear, though, he says he’s looking for the stock market to stay volatile.
Aren’t stocks still really high?
Yes. Despite the recent pullback in the market, the major U.S. stock indexes remain near all-time highs set earlier this month. The benchmark S&P 500 index and Nasdaq each hit all-time highs on Feb. 12. The Dow Jones Industrial Average set a record high on
Wednesday. And the Russell 2000 index of smaller companies notched an all-time high on Feb. 9.
Hasn’t the Fed said it will keep interest rates low?
Yes. The Federal Reserve has direct control over short-term interest rates, and Chair Jerome Powell told Congress this week it’s in no hurry to raise them. It’s also not planning to trim its $120 billion in monthly bond purchases used to put downward pressure on longer-term rates.
Powell said the Fed won’t raise its benchmark interest rate, now at its record low of zero to 0.25%, until inflation runs slightly above its 2% target level. Powell told Congress that while price increases might accelerate in coming months, those increases are expected to be temporary and not a sign of longrun inflation threats.
Is Wall Street still optimistic?
Yes, and one reason is that many investors agree with Powell and expect inflation pressures to be only temporary. That should hopefully keep rates from spiking to dangerous levels.
Also, after a dismal 2020 for most companies, investors are banking that corporate earnings will improve in the second half of this year as vaccination efforts broaden and the economy gradually begins approaching something close to normal. If earnings rise, stocks can stay stable or maybe even rise.
The reasons Kyrie Irving wants the late, great Kobe Bryant to be the NBA logo instead of Jerry West are understandable, especially from his perspective.
Bryant was his mentor.
Irving views Bryant as the player who set the standard for his generation.
"Black Kings built the league," Irving reiterated Thursday.
Phoenix Suns All-Star Devin Booker, who developed a strong connection with Bryant as well, is also on board with the idea.
"I love it," Booker said after Saturday's practice. "He built this game. He built the game for me, myself and I know he's inspired a lot more people than me and Kyrie. So I love the idea."
There's a lot of truth in Irving's statement as the NBA has been predominately Black for decades, but West, a White man from a small town in Cabin Creek, W. Va., helped build the league as did Larry Bird, Bill Bradley, "Pistol" Pete Maravich, John Stockton and many other Caucasians.
I get Irving's point as African-Americans like Bill Russell, Wilt Chamberlain and Oscar Robertson made their mark on the league early, Julius Erving, Magic Johnson and Michael Jordan took it to another level and now LeBron James, Kevin Durant and Stephen Curry are carrying it forward, but the game is also global now.
So guys like Luka Doncic from Slovenia and Giannis Antetokounmpo from
Greece are inspiring the next generation worldwide to play just as James and Bryant inspired them.
However, Bryant, who died Jan. 26, 2020, in a helicopter crash in California along with his daughter, Gigi, and seven others, is an ideal choice if a logo change is made.
While West and I are from the same state and I think he's one of the best to ever play, here's another big reason why the logo switch works for me personally.
As the Lakers general manager, West made the move to get Bryant to Los Angeles in orchestrating that trade with Charlotte during the 1996 draft.
The Hornets drafted the high school superstar out of Lower Merion in Philadelphia and traded him to the Lakers for center Vlade Divac.
Twenty years and five NBA titles later, Bryant left the game as an all-time great — and West set that process in motion by believing in him so much to trade the Lakers' best player at the time for a talented, but skinny, high school kid.
The rest is history.
So to me, this is passing of the torch.
Now you could easily go with Russell.
He endured as much, if not more, than anyone else as far as racial uproar, but was the driving force in Boston winning 11 NBA titles in 13 years.
For me personally, Earl Lloyd comes to mind, too.
Playing college ball at West Virginia State University, an historically Black college, Lloyd was the first African-American to play in an NBA game Oct. 31, 1950, as he was with the Washington Capitols when they played the Rochester Royals.
Lloyd was the first of the first 'Black Kings" in that regard.
Then there's Jordan, perhaps the greatest athlete of all time, but the Nike Air Jordan logo is already the most popular logo on the planet.
Dr. J. and Magic are two more considerations. Julius Erving took over the league when the ABA and NBA merged and became the first NBA superstar who transcended the sport. From his afro to his dunks to commercials to having his own shoe deal, everyone knew who he was and idolized.
Then Magic, along with Bird, took the league to another level in terms fan following and level of play. Those two brought the hated Lakers-Celtics rivalry Russell and West established back to the forefront in competing for championships in the 1980s.
The Lakers won five.
The Celtics took three.
Los Angeles beat Boston twice in three finals matchups between the two rivals.
So there are plenty of players, as Irving eluded to, that could be the new logo if NBA Commissioner Adam Silver chooses to make that switch.
Silver seems to be the ideal guy to make this change, too, but Bryant is the ideal choice to be the new logo.
If it happens, go with No. 8 Bryant with the baby afro.
Just my personal preference.