Ritholtz Wealth Management CEO, Josh Brown, believes that high yields, which have recently spooked the bond market, are not as bad as people think it is.
Brown says the high yields will only affect the most speculative part of the stock market and small-cap stocks.
Global yields surge
The US 30-year treasury yield surged over 5.1% this week, the highest level since 2007, before the financial crisis.
The trust over US assets is decreasing with Moody’s downgrading US sovereign debt, making it the first time that the three major credit rating agencies have downgraded US debt from top grade.
The US administration passing the new tax bill that will increase the debt ceiling by $4 trillion has also made the market worry about the US’s fiscal deficit.
Why Brown thinks high treasury yields are not a problem
Josh Brown believes the equity market can handle the sharp rise in treasury yields. He says the high rates will only hurt the most speculative parts of the market.
He compared it to 2022 when interest rates were increased dramatically. The rise hurt Special Purpose Acquisition Companies (SPACs), IPOs, and tech startups that were overleveraged.
Brown said that when capital has a cost, people’s behaviour also changes.
He pointed out that in the two-year period to 2022, when interest rates were low, there wasn’t much cost to invest as money was freely available.
In a similar scenario that the general market will grow and the tax cuts will be beneficial for everyone, Brown said.
He adds that “But, it’s going to wreck the most speculative areas in the market that could act as a governor on multiples, even for the S&P 500.”
Brown says small-cap stocks will also be hurt by rising yields.
Yield spike a head fake
US investors are worried that rising yields will put a dent in the stock market rally that came after the US and China tariff truce.
Brown thinks differently. He says most of the up move has already happened, and as more evidence of a slowing economy comes in, the rates will be pushed lower.
Brown says there are two narratives, and the market needs to decide which is more believable.
According to him, either the supply chain shocks will be huge or the labor market is cooling with the economy slowing down, making inflation a non-problem.
Brown believes that the latter is the case and the US Federal Reserve will be doing more rate cuts than people’s expectations.
“I can personally look through a 20-year, 30-year north of 5%. For me, that seems like the head fake.” Brown added.
Head fake is a market phenomenon when the price moves in one direction for a time and when the traders take a position based on the trend, realise it is a false signal or a temporary anomaly.
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