Higher energy prices and rising U.S. Treasury yields are causing worry among stock-market investors, according to Bespoke Investment Group.
Economic Growth Under Threat
Bespoke notes that both interest rates and crude oil act as headwinds to economic growth. As they continue to rise steeply, it raises concerns among investors. The firm points out that the only time these two factors surged before a recession was in 2001.
The recent rise in the yield on the 10-year Treasury note is unprecedented. Bespoke refers to this period as "bananas" mode. This yield, which is now at its highest level since October 2007, has increased by over a percentage point since April.
Surging Crude Oil Prices
The surge in crude oil prices over the past few months is also worth noting. According to Bespoke, West Texas Intermediate crude was trading around $90 a barrel on Tuesday afternoon, compared to falling below $70 earlier this year.
Bespoke's research reveals that sharp increases in both Treasury yields and crude oil prices have only led to one economic downturn out of the four recessions since 1983 - the recession in 2001.
Analysis of Oil and Treasury Yield Trends
Bespoke, a prominent research firm, recently conducted an in-depth analysis of the relationship between oil prices and the 10-Year Treasury yield. Specifically, they examined periods where oil experienced a significant increase of at least 25%, while the Treasury yield rose by at least one percentage point within a span of six months. As part of their study, they also delved into the subsequent performance of the S&P 500 index over one-month, three-month, six-month, and 12-month timeframes.
According to Bespoke's findings, historical data reveals that the returns during these periods were generally "weaker than the long-term average since 1983" for all the timeframes they investigated. However, on a median basis, only the six-month decline of 2.54% was found to be weaker than the long-term average gain of 4.77%.
The research firm suggested that these findings indicate a potentially "bumpy ride" ahead for investors. Although returns were positive in approximately three-quarters of the cases three months later, they were lower than average less than half of the time over the next six months. Nevertheless, it is worth noting that returns were higher than average two-thirds of the time by the end of a year.
In light of these insights from Bespoke, concerns over climbing Treasury yields have contributed to a significant drop in U.S. stock markets. As of Tuesday afternoon, the Dow Jones Industrial Average (DJIA) had declined by 1.1%, while the S&P 500 (SPX) and the Nasdaq Composite (COMP) had both experienced slides of 1.5% and 1.6% respectively, as indicated by FactSet data.
The yield on the 10-year Treasury note (BX:TMUBMUSD10Y) rose by 1.7 basis points on Tuesday, reaching a level of 4.558%. This increase signifies a continuation of the upward trend observed over the past three weeks. Impressively, 10-year yields have surged by a staggering 46.8 basis points in just a single month.