The stock market experiences turmoil as the ten-year Treasury yield approaches 5%, causing worries among investors. However, the job market remains robust, and there are opportunities for investment in energy and consumer-discretionary stocks.
The stock market has recently been captivated by the number five, but not for the usual reasons. It holds significance in various religions and is of interest to math enthusiasts as a prime number. Additionally, it is part of the "sexy primes" sequence, which has an intriguing six-number gap between 5 and 11. In numerology, five symbolizes change, evolution, love, and abundance.
However, it is the ten-year Treasury yield nearing 5% that has sparked worries among investors, leading to a decline in the stock market this past week. The S&P 500 index experienced a 2.4% decrease, while the Dow Jones Industrial Average lost 1.6%, and the Nasdaq Composite dropped 3.2%. Love and abundance seemed far away in those moments.
The market turmoil is understandable given the circumstances. The Federal Reserve has been raising the federal-funds rate by 5.25 percentage points since March 2022, at a pace unmatched in over four decades. Simultaneously, the ten-year yield has surged 1.64 percentage points from its lowest point in the last six months. However, investors may be overreacting.
According to Michael Antonelli, managing director and market strategist at Baird, it's not the 5% mark itself that affects stocks but rather the speed at which we have reached it. Despite recent unrest in the Middle East, the stock market could potentially avoid a significant decline if the economy remains stable. And so far, things are looking optimistic.
Recent reports indicate that the job market remains robust, with first-time unemployment claims falling below 200,000. Furthermore, economists predict that the U.S. gross-domestic-product growth for the third quarter will reach 3.3%, according to the Atlanta Fed's GDPNow model, which puts it at an even higher estimate of 5.4%.
It is crucial to acknowledge the macroeconomic and geopolitical concerns affecting the markets today. However, it is equally important not to overestimate their significance and potentially harm one's investment portfolio. To navigate these challenges, Antonelli suggests focusing on energy stocks, which have been boosted by oil prices exceeding $90 per barrel. The Energy Select Sector SPDR exchange-traded fund (ticker: XLE) has been trading steadily this year and offers reliable dividends. Additionally, "high quality" consumer-discretionary stocks present excellent opportunities and will thrive as long as the economy remains robust. In fact, September saw a 0.7% increase in retail sales, and despite a 5.4% dip in stock prices after the release, American Express (AXP) still reported record-breaking revenue and profit.
Although the stock market needs time to adjust to higher bond yields and the likelihood that they will remain elevated for an extended period, there is reason to believe this will be the new normal. Federal Reserve Chairman Jerome Powell's recent remarks at the Economic Club of New York suggest that interest rates will remain steady while higher bond yields play their role in the market.
While the number five might trigger unease among investors, we urge them to take a deep breath and remember that this situation is temporary. By remaining calm and patient, we can navigate these challenges successfully.
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