Strategist says a bond market 'tipping point' will signal it's time to sell stocks

Published Fri, Nov 20 20201:29 AM EST

Key Points

In a research note Thursday, BCA's Chief European Investment Strategist Dhaval Joshi highlighted that since early 2018, a rise in the benchmark U.S. 10-year Treasury yield had "sent shudders through the stock market on four occasions: February 2018, October 2018, April 2019, and January 2020."

The stock market rally from March's lows is reaching a near-term valuation test, according to BCA Research, and Treasury yields will give a signal when it's time to sell. Despite the uncertainty and risk associated with the Covid-19 pandemic, global stock markets have been on a tear since the coronavirus-induced crash in March. The S & P 500 is up more than 10% year-to-date despite the pandemic, and has climbed by around 59.5% from March's lows. Meanwhile, the pan-European Stoxx 600 is still down almost 7% since the start of the year but sits around 39% higher than its Covid trough. Stocks got an additional boost this week when Moderna became the second pharmaceuticals company to say its coronavirus vaccine was highly effective in preventing Covid-19. In a research note Thursday, BCA's Chief European Investment Strategist Dhaval Joshi highlighted that since early 2018, a rise in the benchmark U.S. 10-year Treasury yield had "sent shudders through the stock market on four occasions: February 2018, October 2018, April 2019, and January 2020." "On all four occasions, the tipping point was the earnings yield premium on tech stocks versus the 10-year T-bond yield falling towards its lower limit of 2.5 percent," Joshi said. The earnings yield is a company's earnings per share divided by its share price. The tech stocks/10-year yield premium currently stands at 2.8%, according to BCA analysis, and a 30-basis point rise in the U.S. 10-year Treasury yield could retest the 2.5% level. Conversely, if Treasury yields stayed put, this "tipping point" would be reached if tech stocks rallied by around 10%, BCA added. "Crucially, this means that the stock market's 60 percent rally since mid-March is reaching a near-term valuation test," Joshi said. "We recommend selling stocks and waiting on the side lines if the earnings yield gap on tech stocks versus the T-bond yield approaches its lower limit of 2.5 percent – from any combination of moderately higher bond yields or higher stock prices over the coming weeks." The 10-year Treasury yield was at 0.8308% in the early hours of Friday morning, having started the year above 1.8%. Yields move inversely to prices, which have risen sharply as investors sought traditional safe haven assets amid the uncertainty and volatility of the pandemic. BCA has also suggested investors go "aggressively overweight" Treasurys on any modest rise in yields. When it comes to equities, the analysts recommended being overweight health care versus technology stocks, and European versus emerging market equities, over a six- to 12-month period.

Traders work the floor of the New York Stock Exchange.

NYSE

The stock market rally from March's lows is reaching a near-term valuation test, according to BCA Research, and Treasury yields will give a signal when it's time to sell.

Despite the uncertainty and risk associated with the Covid-19 pandemic, global stock markets have been on a tear since the coronavirus-induced crash in March. The S&P 500 is up more than 10% year-to-date despite the pandemic, and has climbed by around 59.5% from March's lows.

Meanwhile, the pan-European Stoxx 600 is still down almost 7% since the start of the year but sits around 39% higher than its Covid trough. Stocks got an additional boost this week when Moderna became the second pharmaceuticals company to say its coronavirus vaccine was highly effective in preventing Covid-19.

In a research note Thursday, BCA's Chief European Investment Strategist Dhaval Joshi highlighted that since early 2018, a rise in the benchmark U.S. 10-year Treasury yield had "sent shudders through the stock market on four occasions: February 2018, October 2018, April 2019, and January 2020."