Sandler O’Neill strategist Robert Albertson surging interest rates stand a very good chance of sparking a stock-market tumble.
“There’s probably a correction coming in the market, maybe in the vicinity of 8 percent,” because as yields and rates go higher equity values decline, Robert Albertson told CNBC, blaming rising bond yields and increasing concerns about a more aggressive path for Fed rate hikes.
A "correction" is commonly defined as a temporary drop of at least 10 percent to adjust for a stock-market overvaluation.
“I kind of start from there when I’m looking for a place to invest in, certainly within the financial sector,” he said.
Albertson isn't alone in his trepidation about the market.
To be sure, Bloomberg recently explained that stock investors have learned to live with a lot during a 10-year bull run. But one thing they’ve repeatedly struggled to process is stress in the bond market that comes upon them swiftly.
Nobody’s saying anything like February’s rout is in the offing now. But in a stock market immune to everything from trade wars to emerging economy implosions, the recent yield-induced market lurches was another demonstration that it remains vulnerable to signs of a crack in credit.
“Leverage is near all-time highs, and companies used tax reform proceeds for buybacks instead of paying down debt,” said Max Gokhman, head of asset allocation for Pacific Life Fund Advisors, which manages $40 billion. “More than triple the debt that came due in 2018 will be due each year from ’19-’21. If yields go up, there’s real concern about companies’ ability to reissue and keep their leverage.”
While the altitude of yields makes headlines, for the past year it’s been the suddenness of moves in Treasuries that have incited the real angst in equities. Going by this, it’s not any specific economic signal or higher borrowing cost themselves spooking bulls, but knee-jerk selling spreading from bond portfolios and fear losses will worsen.
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