The Tell: Will a stock-market rally follow a peak in bond yields? It depends.

by | Nov 6, 2023 | Stock Market

It’s no secret that Treasury yields seem to be calling the tune for the stock market. Soaring yields got most of the blame for a selloff that saw the S&P 500 slip more than 10% from its late July high into correction territory at the end of last month.

Last week was turnabout. Yields on 10-year Treasury notes
and 30-year Treasury bonds
saw their biggest drop since March. Stocks soared, with the S&P 500
Dow Jones Industrial Average
and Nasdaq Composite
logging their biggest weekly gains of 2023. The S&P 500 ended Friday at 4,358.34.

Investors can debate whether the top is in for yields, which move opposite to Treasury prices. But the lingering question is whether a definitive top in yields will be a definitive signal that stocks can resume their 2023 rally. Like most things market-related, it all depends on the context. Or as analysts at U.K.-based Matrix Trade put in a Sunday note: Yields “could top for a variety of reasons but not all of them would be good for stocks.” A bullish scenario for stocks would see the economy stays strong as inflation drops back to levels that would eventually allow the Federal Reserve to cut interest rates without a 1970s-style secondary wave of inflation, they said. They don’t see that scenario as likely, “but without a spike higher in unemployment, it could still happen,” they wrote. Read: Wall Street veteran sees ‘once in a generation buying opportunity’ in unloved areas of global stocks A recession, on the other hand, could see yields and stocks move lower together as they did in 2000-2002 and 2007-2009. See: The Dow ripped higher last week. Why doubters ‘don’t believe in this rebound.’ Economists have been flummoxed by the resilient economy, they noted, with the vast majority having called for a 2023 recession at the beginning of the year, only to change their tune in July or August around when the S&P 500 logged its high for the year. Part of the difficulty is the “variable timing” of the signal provided by the inversion of the yield curve, they said. An inverted curve, in which short-dated yields exceed long-dated yields, is seen as a reliable recession precursor, but with uncertain timing. The Matrix Trade analysts said the signal can be fine-tuned by combining it with unemployment claims. They expect f …

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