Josh Brown, CEO of Ritholtz Wealth Management, says that the high yields which recently caused bond markets to roil aren’t as bad as they think.
Brown claims that the highest yields are only going to affect small cap stocks and the most speculative parts of the market.
Global yields surge
This week the US 30-year Treasury yield soared to over 5,1%, its highest level since 2007. Before the financial crisis.
Moody’s has downgraded US sovereign debt for the first time, and the other three credit agencies are expected to follow suit soon.
Markets are also worried about the US fiscal deficit after the US passed a new tax law that would increase the US debt ceiling by 4 trillion dollars.
Brown’s view on high Treasury yields
Josh Brown is confident that the stock market will be able to handle the steep rise in Treasury yields. According to him, the rates are too high and will hurt only the most speculative sectors of the stock market.
He made a comparison to 2022, when rates dramatically increased. This increase hurt Special Purpose Acquisition Companies, IPOs and over-leveraged tech startups.
Brown stated that people change their behaviour when they are faced with a capital cost.
In the period of two years to 2022 when rates are low, it is not expensive to invest, as there’s plenty of money available.
Brown stated that in a similar situation, the market would grow overall and tax reductions will benefit everyone.
He continues, “But it will wreck the most speculative parts of the market, which could be a regulator on multiples even for S&P 500.”
Brown claims that small-cap stock will be affected by the rising yields.
A head fake that yields spikes
US investors worry that the rising yields could dampen the rally in stock markets that followed the US-China tariff truce.
Brown has a different view. Brown says that the majority of the rate increase has already occurred, but as evidence comes to light of an economy slowing, rates will continue to fall.
Brown says that there are actually two stories, and it is up to the market which one they believe.
He believes that either supply chain shocks are going to be large or the labor markets will cool down as the economy is slowing, which would make inflation non-existent.
Brown thinks that this is true and there will be more rate reductions than what people expect.
I can look at a 30-year and a 20-year period that is north of 5%. Brown continued, “For me, it seems to be a head-fake.”
The head fake occurs when the market moves for some time in a certain direction and the traders, after taking a trade based on that trend, realize it was a false or temporary signal.
As new information becomes available, this post may change.
