Current Yields 'Normal,' Narrowness of Market Rally Not Concerning Yet

SPEAKER_1 (0:00)

Welcome back to Opening Bell. Joining me right now, Art Hogan, Chief Market Strategist, B. Riley Wealth Management. So glad you're with us, Art. I have a lot of questions for you with all your many years on Wall Street. Let's just first talk about the fact that we have our bond yields at 19-year highs.

We think about the short term and the long term. You know, a lot of folks are talking about why we may see inverted yield curves, the trajectory, how quickly we've had rates moving up. What say you?

Art Hogan (0:29)

Yeah, a couple of things there, Nicole. I think the way to look at this is threefold. First and foremost, I think if you went back to 1960 and took the average yield on a 10-year, it's about 5.8%. So we're not in historic high territories, but the problem is how we got there. So you'll hear a lot of conversations around, hey, the 1990s were great. And we had the yields, treasury yields that were between 5 and 6%, ran a surplus and obviously had great markets and a great economy. Well, those yields were coming down from 9%.

So it's directionally 5% to 6% felt much better, whereas today we're coming up from 1% on treasury yields to 5%.

So that doesn't have a great feeling. But the problem with that is we're really in normal territory. 5% yields on the 10-year are normal. We're just not used to it, and it's been a long time since we've had that. I think it's much more about what's the cause of the higher yields in the treasury curve. And part of that is inflation, right? So I think a big piece of the inflation picture has a lot to do with the war that we're in in Iran and higher energy prices. If, in fact, we were able to see an off ramp to that war, we'd likely see a settling in in treasury yields as well as inflation comes off the boil. So we suspect that we need to get used to four, three-quarters of five percent yield on the tenure unless and until we get to a place where there actually is an end to this war in Iran and we can start to see energy start to trend lower.

SPEAKER_1 (1:47)

I had a guest yesterday, Dave Wittell, I heard Kathy Wood talking about nominal GDP and how that's at a higher level and that can affect the short end of the curve versus the long end, and that's why it's a different picture and that yields can go up for a couple of reasons. One, worries about the United States and or a great economy.

We have a few things that are all coming to head here.

Art Hogan (2:15)

Yeah, it's such a really important point. I think when you think about the fact that you'll have a lot of doomsayers that are saying, well, it's because of our debt to GDP. Well, if that were the case, the yields would be much higher if there was some concern about a sovereign debt issue in the United States. That's not it. I would lean in the other direction on that argument that you make. It has more to do with the fact that in nominal terms, GDP is very strong. In real terms, if you look at the Atlanta Fed estimates for this quarter's GDP are much higher than the first two quarters of this year.

The economy is actually doing well. A lot of that has to do with a massive amount of capex that's going on, but a consumer that has actually remained very resilient. I think there's two sides to that story. I would lean in to this strength, but I would also point out the fact that if we were to see inflation start coming down the way it was before the war started, we'd certainly see more relief on the treasury curve on both ends, both in the front and the back end of the curve.

SPEAKER_1 (3:08)

We think about when the break is, when things go bad.

I don't mean to be doom and gloom. We're here talking about a great economy, and the question could be when will the economy break? Also the stock market. I read an article recently in which you were quoted, and it was talking about the market being at or near highs. But the number of highs and lows, right? You think about market breadth. There were seven highs, new highs made on the S&P 500 to the 30

That hit lows. I think that's what it said. What are your thoughts on something like this? Is that a precursor to some sort of sell-off or crisis? What does that mean to you?