Anything For You All: Credit Suisse has identified what could be the next big breaking point for stocks

Credit Suisse has identified what could be the next big breaking point for stocks

Credit Suisse has crunched the numbers and approximated the point at which US 10-year Treasury yields could start to weigh on equity returns.
The firm argues that higher rates don't hurt stocks until a certain threshold is exceeded, after which point stocks become indifferent, which could lead to equity weakness.

Conventional wisdom suggests that higher interest rates make stocks less attractive. As bonds offer higher yields, equities lose their appeal on a relative-return basis.

Credit Suisse argues that investors shouldn't be worried about this dynamic — at least not yet. But the firm does warn of possible trouble ahead as the Federal Reserve prepares for further interest-rate hikes.

The firm has crunched the numbers and found that stocks have historically increased amid rising rates, as long as the 10-year Treasury yield stays below a specific level. At present time, that turning point is 3.5%, or roughly 60 basis points above current levels.

Put differently, in Credit Suisse's view, all bets are off once the 10-year yield climbs above 3.5%, since that's the point where stocks get indifferent to rate moves, which could open the door to weakness.

This chart shows the positive performance stocks have enjoyed since 2014 with Treasury yields at 3% or below. As you can see from the two negative bars on the right, the bank is projecting equity losses once yields start to exceed 3.5%.

"Equities respond positively to rising rates until yields hit some threshold," Credit Suisse's chief US equity strategist, Jonathan Golub, wrote in a client note. "Our research shows that from 1991–2014, this threshold was 5–6%, but has declined to 3 1/2% over the past several years."

Credit Suisse included another chart that goes further toward showing how the bank arrived at the 3.5% Treasury yield that it says will prove a point of reckoning for stocks. The firm has drawn a trendline based on past S&P 500 performance on days when interest rates rose, and arrived at 3.5% as its key inflection point.

Read »