By Joyce Yu
The Dow plunged shortly after opening higher on Wednesday. Even Boeing couldn’t help the market settle down as investors continue to sell with Treasury yielding 3%. The logic behind fear of the 3% yield is nothing difficult: With the S&P 500 dividend yield at 1.9%, a risk-free investment like U.S. Treasurys offering 3% yield makes more sense in a volatile environment.
“The cost of sitting on the sidelines in cash has gone down,” said Matt Toms, chief investment officer for fixed income at Voya Investment Management. “In the past years of quantitative easing, there was a penalty to not taking risk.”
“Bond yields were low, cash yields were low, and you were forced into the risk products,” he told CNBC. “What you’re seeing now is you can have a reasonable chance of 4 to 5 percent on income without the same volatility as equities. I do believe that influences equity valuations.”
The yield on the 10-year US Treasury note breached 3% for the first time in more than four years this week. “For 10 years, rates were kept artificially low to encourage risk taking,” said Jack Ablin, founding partner of Cresset Wealth. “Once we get to more normal levels, that’s going to become a challenge for equities as an asset class.”
Even strong corporate earnings couldn’t help the market settle down. A slew of good results were announced on Wednesday: Boeing reported earnings and revenue that easily beat expectations; Twitter posted a better-than-expected profit and revenue for the first quarter; Comcast also posted stronger-than-forecast earnings and revenue. Investors still worried that corporations may not be able to maintain their pace of earnings growth.
Investors are immune to earnings strength with shares of companies that beat are being sold and stocks that dare miss are being punished even more harshly. What they want is clear and optimistic forecasts for the rest of this year which are simply aren’t available.
Jeremy Klein, chief market strategist at FBN Securities, on the other hand, he is not too worried about corporate earnings.
“Fears of ‘peak earnings’ are laughable considering that the average constituent in the S&P 500 has enjoyed year-over-year bottom line growth in excess of 20%,” Klein wrote in a note. “Revenues have increased by nearly 10%. Solid economic data, which includes strong consumer and business confidence, makes an imminent recession a remote possibility.”