Four at Four: Paying 5%; China’s Importance
Posted by David Gaffen
With 10-year note yields creeping toward 5% and perhaps higher, the chances of the equity market continuing to avoid a challenge to its rally dissipate. Futures markets have very little odds of a Fed rate cut priced in, and though removing that possibility is seen as a positive by equity types who foresee better-than-expected long-term growth, there is still the chance that higher yields will cut into the things that are good for stocks — profits and borrowing costs. “If there’s one thing to end this whole party, it’s higher interest rates,” says Peter Boockvar, equity analyst at Miller Tabak. “Whether it’s at 5%, 5.25%, or 5.50%, I have no idea.”
It’s all good, according to strategists. As noted earlier, Tobias Levkovich of Citigroup raised his year-end targets on the Dow and S&P Midcap 400 earlier today. Rod Smyth of Wachovia Securities says in weekly commentary that “rising bond yields need not worry stock investors.” A number of strategists today pointed out the dearth of bulls among individual investors, which is seen as a bullish factor (as they’re likely to get into the market one way or another down the road). But at some point, the sheer volume of people pointing out the contrarian view (that stocks will keep going up) has to be considered contarian in itself, no?
China — the equity market, anyway — just isn’t that big. The Chinese market only accounts for 4% of the global market capitalization, and the 15% decline in the Shanghai Composite only really hurts domestic investors, because that decline refers to “A” shares, which aren’t sold to foreigners, as Bianco Research notes in a commentary. The “B” shares of those indexes, which foreigners are allowed to buy, are up just 7.9%, trailing the S&P 500 on the year. “Foreign investors have already priced in a crash of Chinese stocks,” they write. “At this point it will take a 40% to 50% decline in A-shares to close the performance and valuation gap between the classes.”
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