Today, there are two big numbers you should care about in markets: 5% and 200.
5% is the level the 10-year Treasury yield bumped up against. 200 — or the 200-day moving average — is a key line in the sand that the S&P 500 just breached.
You could argue that these may be the breaking points for stocks and bonds. Hold these levels, and we could see prices stabilize. Break these levels, and the current selloff could get nasty.
Markets are rarely so cut and dry, though.
5% on the 10-year yield is a key level, both psychologically and technically speaking. But it may be a cue to some that Treasuries have fallen too far, too fast.
And yes, the S&P’s 200-day moving average of 4,235 is important. Yet right below 4,235 is another key level: 4,200, or this month’s low for the index. Bearish options positions are building up around 4,200, a sign that investors are anticipating the selloff to get worse. That could be a contrarian signal, though — usually, the most dramatic selloffs are the ones we aren’t expecting.
So here’s what you should do as we test these breaking points:
Don’t panic. Yields have momentum on their side, but the fundamentals may support a 10-year yield much lower than 5%. There’s a clear case for lower yields. It may just take time.
Stay hedged (or opportunistic). As an investor, your main concern is staying solvent when markets act irrational. Think of how you can guard your portfolio against this spike in yields, even if it’s temporary. And if you’re expecting lower yields ahead, that environment could offer some relief to rate-sensitive sectors and dividend stocks.
Think outside the stocks. Sure, yields may be saying the economy is overheating and inflation is back. But rallies in gold and the US dollar are painting a picture of caution. How long can this surge in yields last if two other classic safe havens disagree?
*Data sourced through Bloomberg. Can be made available upon request.