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Rising Interest Rates and Stock Performance

 View from the Observation Deck  

  1. Today's blog post provides some historical perspective on how the S&P 500 Index has performed in calendar years when the yield on the benchmark 10-year Treasury note (T-note) finished the year higher than where it began.
  2. From 1975-2017, there were 20 such years (see table). The S&P 500 Index posted a positive total return in 17 of those 20 years. The yield on the 10-year T-note is up markedly so far in 2018. 
  3. The yield on the 10-year T-note increased in excess of 100 basis points in 10 of the 20 years, with the most recent being 2013.
  4. Monitoring the yield on the 10-year T-note is commonplace for equity investors, in our opinion. The higher the yield trends the more competitive Treasuries become as an alternative investment opportunity to equities.
  5. Standard & Poor's showed that, from 1953 through March 2012, U.S. stocks posted their best returns when the yield on the 10-year T-note rose to around 4.0%, according to Businessweek. Stock prices usually retrenched when the yield topped 6.0%. Its yield stood at 2.89% on 2/20/18.  

This chart is for illustrative purposes only and not indicative of any actual investment. The illustration excludes the effects of taxes and brokerage commissions and other expenses incurred when investing. Investors cannot invest directly in an index. The S&P 500 Index is a capitalization-weighted index comprised of 500 stocks (currently 505) used to measure large-cap U.S. stock market performance.

Download a PDF of this post, please click here.

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Latest Market News

 Stocks fell for the week as investors grappled with higher bond yields, political risks around the globe, trade tensions and higher energy prices. The real estate and utilities sectors, which tend to be bond proxies due to their high dividend yields, lost over 2% for the week. By contrast, the materials and energy sectors posted the biggest gains as investors are starting to price in higher inflation expectations. In economic news, retail sales rose 0.3% in April, in-line with forecasts, as higher paychecks from tax-cuts offset rising fuel costs. In stock news, both Walmart Inc.

 Treasury prices dropped moderately over the course of the week on strong economic data and speculation that both the Federal Reserve and European Central Bank may raise interest rates more quickly than previously expected. On Tuesday, April Advance Retail Sales were solid while March sales figures were revised to 0.8%, and May Empire Manufacturing was higher than expected, causing a risk-on environment which led to a significant drop in Treasury prices. It was also reported on Tuesday that the U.S.

 View from the Observation Deck  

Securities offered through Harbour Investments, Inc.,
member FINRA/SIPC. http://www.finra.org/
http://www.sipc.org/about-sipc

Investment Advisory Services offered through
Compass Financial Advisors, LLC,
a registered Advisor. 
Compass Financial Advisors, LLC &
Harbour Investments, Inc.
are separate entities.

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