You might not know it from Friday’s strong market rally, but the prospect of rising rates still hangs over investors’ heads, after the 10-year yield TMUBMUSD10Y, -0.03% , at one point, knocked out a four-year high.
The 3% line, which is within spitting distance, is the level that’s often thrown out there as a troubling hot spot for equities.
“The best S&P 500 SPX, +1.60% returns have occurred when the 10-year Treasury yields has ranged from 2% to 3%, particularly when yields have been rising,” writes Bank of America Merrill Lynch’s Savita Subramanian. “While average historical stock returns remain positive until interest rates cross above 6%, the probability of losing money begins to increase as interest rates cross above 3%.”
But Goldman Sachs GS, +2.04% , in our call of the day, is looking at the potential 4.5% level by year-end and the damage it would do to equities. The bank’s base case is for 3.25% by the time 2019 arrives — but Goldman isn’t counting out the possibility of a much more dire outcome for the market.
“A rise in rates to 4.5% by year-end would cause a 20% to 25% decline in equity prices,” Goldman economist Daan Struyven says in a note highlighted by Bloomberg. Such a hit would bring the S&P down as low as 2,155.
Of course, not everybody sees it that way. The Fly, the anonymous blogger behind the iBankCoin blog, calls Struyven’s report “asinine.” The blogger says there’s a better chance of “a gigantic asteroid striking the planet rendering all life obsolete” than there is the 10-year jumping to 4.5% in that time frame.
The Fly had some other choice words for Goldman’s take and the dummies reporting on it (me, for instance), but we’ll stick to the ones we don’t have to bleep out: “These notes are designed to shake people upside down until their money drops out of them, permitting Daan’s employers to gobble it all up like Noo-Noo.”
So far, no disaster in sight, as stocks are up premarket.
Key market gauges
Futures for the Dow YMH8, +0.66% , S&P ESH8, +0.43% and Nasdaq NQH8, +0.27% are all higher, while gold GCH8, +0.82% gains and crude CLJ8, -0.11% dips. Europe SXXP, +0.50% is seeing some buying interest, and Asian markets ADOW, +1.06% closed in the green. Bitcoin BTCUSD, +1.53% is holding around $9,500.
Last week, the Dow DJIA, +1.39% finished in the green, thanks to a strong Friday rally that saw blue chips tack on 348 points. The index has been up for two straight weeks, logging its biggest two-week climb since November 2016.
The buzz
Gun stocks could see another active trading session after they came under pressure in Friday’s volatile session. The gun-control debate continue to heat up following the latest school massacre, and investment funds have come under renewed pressure to divest from the sector (more on this in “The stat” section below).
Xi Jinping could be around for a while. China’s ruling Communist Party on Sunday proposed the removal of a constitutional clause limiting presidential service to just two terms in office. Xi has been president for more than five years and has taken down top leaders in his popular attack on pervasive corruption in the country.
Brought lower by the allegations against co-founder Harvey Weinstein, the Weinstein Co. will file for bankruptcy after talks for a sale fell apart.
Samsung Electronics launched its newest flagship phone in Barcelona on Sunday, and it is betting its customers will embrace the animated emojis. It looks a lot like last year’s model, but it’s reportedly packed with new features. Check out the introduction to the phone, which was trending on YouTube over the weekend:
The chart
According to the latest data from the Treasury, the gross national debt has reached a whopping $20.8 trillion. Less than six months ago, that figure stood at $19.8 trillion.
Yes, in less than half a year, the national debt has ballooned by $1 trillion. Wolf Richter of the Wolf Street blog captures the journey, debt ceiling after debt ceiling, in this chart.
“Note the somewhat technical jargon (marked in green) of what will happen going forward,” Richter says, explaining in his post that the debt ceiling is like playing toss with a loaded gun.
“The gun will normally not go off because almost everyone is trying very hard to catch the gun without pulling the trigger. And historically speaking, it hasn’t gone off yet, and everyone hopes that it will never go off,” he says. “It’s dramatic, and sound bites from those playing toss permeate the media, but what it really does is distract from the consequences of the fiscal policies that these same people are hammering out in Congress.”
Those consequences, he explains, are best summed up over time in the gross national debt.
“The trillions fly by so fast these days, we can’t even see them anymore,” he says. “And afterwards we wonder: What was that? Where did it go?”
The stat
11% — That’s how much BlackRock BLK, +1.89% owns of American Outdoors Brands AOBC, -1.19% formerly gun maker Smith & Wesson, according to a Barron’s story entitled, “We’re all gun owners, and here's why.”
Larry Fink, chief executive at the massive fund management firm, previously wrote to other U.S. CEOs that he expects them to not just generate financial returns but also “serve a social purpose” and “make a positive contribution to society.”
After being contacted by Barron’s for the story, BlackRock responded by saying it's “engaging with weapons manufacturers and distributors to understand their response to recent events.”
Read: Do you support gun control? Then take a closer look at your 401(k)
The quote
“If Wall Street analysts or board members urge that brand of CEO to consider possible acquisitions, it’s a bit like telling your ripening teenager to be sure to have a normal sex life” — That’s just one of many nuggets from Warren Buffett’s annual letter to Berkshire Hathaway BRK.A, +0.87% shareholders released over the weekend.
Check out: Here’s Buffett’s strongest argument against buying stocks with borrowed money
The economy
On today’s docket, we get a look at the Chicago Fed National Activity Index for January at 8:30 a.m. Eastern. Then, at 10 a.m. Eastern, new home sales for the same month get released by the Census Bureau, followed by the Dallas Fed Survey of Manufacturing Activity 30 minutes later.
Looking ahead this week, keep an eye out for the second estimate of fourth-quarter GDP, February car sales and the December Case-Shiller house price index. Also of note, Jerome Powell, the new Federal Reserve chairman, will speak in front of lawmakers on Tuesday and Thursday.
Random reads
Even if we stop emitting greenhouse gases completely now, sea levels will still be rising for another 300 years, new study shows.
Can this $25,000 robot beat your favorite barista?
There’s an art to writing a good obituary.
BuzzFeed asks: How good are you with money?
Why the Oscar best-director race is a heartbreaker.
Monica Lewinsky has a lot to say in her Vanity Fair piece.
Justin Thomas wins the Honda Classic, but not before going full uptight golfer and kicking some fan out for yelling for his ball to get in the bunker:
"Who said that? Who was cheering for that ball to get in the bunker? Was that you?"
"You're done, buddy, you're gone."A fan pulls for Justin Thomas' drive to get in a bunker. You then hear someone (Thomas' caddie? or course security?) identify him. pic.twitter.com/piGiWDbtww
— Hayes Permar (@DHPIV) February 25, 2018
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