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The combination of higher energy prices and U.S. Treasury yields are seen as “kryptonite for the economy,” worrying stock-market investors, according to Bespoke Investment Group.
“Interest rates and crude oil both act as headwinds to economic growth, so when they’re both rising at steep angles, it should raise at least some level of concern for all but the completely oblivious,” said Bespoke in a note emailed Tuesday. “We were surprised to find that the only period where crude oil and 10-year yields surged right before a recession was leading up to the one in 2001.”
With Monday’s rise, the yield on the 10-year Treasury note “entered what we unofficially call ‘bananas’ mode,” the firm said. Ten-year yields, which have jumped to their highest level since October 2007, have soared more than a percentage point since the intraday low in early April, according to the note.
“While not as monumental as the move in the 10-year, crude oil has also surged over the last several months,” said Bespoke. West Texas Intermediate crude
CL00,
was trading around $90 a barrel on Tuesday afternoon, after earlier this year falling below $70, FactSet data show.
BESPOKE INVESTMENT GROUP NOTE EMAILED SEPT. 26, 2023
In the four recessions since 1983, similarly sharp increases as seen now in both Treasury yields and crude oil led up to only one economic downturn, with that being 2001, Bespoke found.
Bespoke looked at periods where oil was up at least 25% while the 10-Year Treasury yield rose at least one percentage point in the same six-month stretch, also digging into the S&P 500’s performance over the following one-month, three-month, six-month and 12-months periods.
History shows that returns were on average “weaker than the long-term average since 1983 for all timeframes” examined by the firm, according to the note.
BESPOKE INVESTMENT GROUP NOTE EMAILED SEPT. 26, 2023
But “on a median basis, only the six-month decline of 2.54% was weaker than the long-term average gain of 4.77%,” the note shows.
‘Bumpy ride’
“The fact that returns were positive over three-quarters of the time three months later, higher less than half of the time over the next six months, but then higher two-thirds of the time a year later, suggests that it could be a bumpy ride,” said Bespoke.
U.S. stocks ended sharply lower Tuesday as worries over climbing Treasury yields persisted. The Dow Jones Industrial Average
DJIA
fell 1.1% in its biggest daily percentage drop since March, while the S&P 500
SPX
slid 1.5% and the Nasdaq Composite
COMP
slumped 1.6%, FactSet data show.
The yield on the 10-year Treasury note
BX:TMUBMUSD10Y
rose 1.7 basis points on Tuesday to 4.558%, continuing to climb after increasing three straight weeks, according to Dow Jones Market Data. Just this month, 10-year yields have jumped 46.8 basis points.
Read: Why the stock market’s September stumble isn’t just about rising bond yields
