Bitcoin $100,000 and Dow 45,000: Don’t overlook this part of the ‘everything’ rally

12/08/2024 20:29

A pullback in long-term Treasury yields is getting less attention, but may be an important piece of the puzzle as stocks and other assets soar.

Markets kicked off the first week of December on a celebratory note. - Nicholas Kamm/Agence France-Presse/Getty Images

It feels like an everything rally. Long-time crypto enthusiasts are claiming vindication after bitcoin this week eclipsed the $100,000 threshold, while the Dow Jones Industrial Average topped 45,000 for the first time ever as stocks continued their steady march to back-to-back stellar years.

Meanwhile, a pullback in long-term Treasury yields is getting less attention, but may be an important piece of the puzzle. After all, just a few weeks ago, investors were warning that stocks couldn’t be expected to continue their rally at the same time a bond-market selloff pushed yields toward their highs of the year and possibly beyond. Something had to give.

That something was the bond selloff.

Yields, which move opposite to debt prices, have retreated significantly since mid-November, when fears over President-Elect Donald Trump’s tariff policies and spending plans pushed the rate on the 10-year Treasury note BX:TMUBMUSD10Y to an intraday high of 4.50% — its loftiest since May and above a level some market watchers said would begin to pose trouble for stock-market bulls.

The yield on the 10-year note has now fallen for three straight weeks, ending Friday at 4.15%, its lowest based on 3 p.m. ET levels since Oct. 18, according to FactSet.

That’s not to say the pullback in yields is a primary driver of the stock-market rally. Some analysts contend moves in both markets are driven more by year-end rebalancing flows and say the partial reversal of the rise in yields since late September has blunted, at least for now, a potential obstacle.

“Yields are always important, especially the 10-year when looking at mortgage rates or longer-term rate forecasts,” said Chris Zaccarelli, chief investment officer at Northlight Asset Management in Charlotte, N.C., in a phone interview.

Investors have also highlighted sensitivity to yields with stocks sporting historically high valuations. Higher Treasury yields depress the present value of future earnings and cash flow.

A 10-year yield at 3.6% in September was too low, reflecting expectations the Federal Reserve would cut interest rates half a dozen or more times and drop the fed-funds rate significantly, Zaccarelli said. The selloff that subsequently took the yield higher reflected the possibility of stronger economic growth or slightly higher inflation that would result in fewer Fed rate cuts — a move that likely took yields too high.

The present yield represents a moderation between those optimistic and pessimistic scenarios, he said.

Jitania Kandhari, deputy chief investment officer of the solutions and multiasset group at Morgan Stanley Investment Management, told MarketWatch she expects 4.5% to serve as a lid on the 10-year Treasury yield.

She reckons that inflation fears tied to import tariffs are overblown, given a lack of feed-through from tariffs to the consumer-price index in Trump’s first term. Shifts in currency markets and other factors may serve to blunt the impact of tariffs on the CPI.

A 4.5% yield on the 10-year Treasury represents a real, or inflation-adjusted, yield of around 2%, which is high by historical standards, particularly given the U.S. government’s massive debt pile and the sensitivity of debt-service costs to real rates. Past high-debt episodes have seen authorities work to contain real rates, and that’s likely to be the case again, she said.

Much will depend on what Trump actually does upon his return to the Oval Office when it comes to tariffs and spending plans. The fiscal deficit will remain a concern as investors weigh efforts, including those by Elon Musk and Vivek Ramaswamy, to cut spending to make room for tax cuts. Their “DOGE,” or Department of Government Efficiency, goal of eliminating $2 trillion of spending is viewed as unrealistic to say the least, but could serve to offset some of the tax cuts Trump would like to extend or newly implement, said economists at Pantheon Macroeconomics in a note late last month.

Meanwhile, bulls appear to be solidly in control of the stock market. The S&P 500 SPX and Nasdaq Composite COMP both ended Friday at a record. The S&P 500 is up nearly 28% so far this year, while the Nasdaq has soared over 32%. The Dow Jones Industrial Average DJIA lost some steam after closing above 45,000 for the first time on Wednesday, but ended the week just 0.8% off its record finish.

And then there’s bitcoin BTCUSD, which soared through the $100,000 barrier Wednesday night, with the final push attributed to optimism over Trump’s crypto-friendly personnel moves and remarks by Fed Chair Jerome Powell likening crypto to gold in terms of how it is viewed by investors.

It’s difficult to make much of a direct relationship between bitcoin and stocks, said Zaccarelli, but the move above $100,000 is “just indicative of an overall risk-on environment,” he said. “It’s an indicator of animal spirits and a willingness to speculate.”