Dear Reader,
Good morning,
Happy Monday. First full week of 2025.
Today I want to talk about the biggest risk to stocks going into 2025.
If there is anything you get from working with us here at Behind the Markets, this is the most important – this is what I want you to focus on:
The yield on the 10-year bond.
This determines and controls more than anything out there other than stock earnings.
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I’ve said this before and I’ll say it again – stock prices and bond yields have an inverse relationship.
If the 10-year treasury yield goes up, stock prices go down.
If the 10-year treasury yield goes down, stock prices go up.
It’s a see-saw relationship.
This is very important.
Now, everything I’ve been talking about the past six months about the deficits and the debt and spending in this country since 2020, really show up in the 10-year treasury yield.
Remember something: in the past year the Fed has lowered interest rates 100 basis points – one full percentage point.
While that has happened, the yield on the 10-year treasury has gone up about that amount – 80 basis points, almost one full percentage point – depends on the day.
But just to show you how inversely correlated they are, how much of a see-saw relationship this is…
I pulled some research from Evercore ISI, and they show that since the 2020 yield low when the Fed pushed down interest rates, stocks have advanced a cumulative 117% over 1,754 days.
So, stocks have basically doubled since the 2020 interest rate low.
However, stocks slipped 2.1% over the 89 days when the 10-year treasury yield rose above 4.5%...
Stocks were down 3.7% over the 20 days the 10-year treasury yield traded above 4.75%.
This is the reason the market’s been so weak in December – because the treasury yield just started to bounce above that 4.5% magic number that pushes stocks down.
It really acts like gravity, pulling down stock prices.
If this yield goes from 4.5% to 4.75%, it’ll push stocks down even more.
So remember: 4.5% yield on the 10-year treasury is the magic number.
Since 2020, when the yield hits 4.5% stocks just start to go down, period.
When it hits 4.75%, stocks go down a lot more.
We think the 10-year yield should be around 5% to 5.5%.
If that happened, the market would drop substantially from here.
So, I want you to focus on the U.S. 10-year treasury yield.
If it’s at 4.5%, be a little cautious.
If it looks like it’s rising up to 4.5%, be a little cautious.
If it’s over 4.5% be very cautious.
If it’s 4.75% or higher, the evidence speaks for itself.
Start thinking of stock prices in relation to treasury yields so you can play this game with a little more sophistication.
I’ll see you tomorrow.
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