Market Starting To Crack Under High Bond Yields? | WMR 9 24 26

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Michael Lebowitz (0:56)

The interest rate, economically sensitive sectors are starting to feel interest rates.

We don't see it in the S&P 500 because there's 10 stocks dragging this thing higher, or 20 stocks. You know, it's a very small number of AI technology-specific stocks that are masking, that are making the sea look very calm. Underneath, we're getting some significant churn.

Adam Taggart (1:31)

Welcome to Thoughtful Money.

Thoughtful Money founder and your host, Adam Taggart, welcoming you here at the end of the week for another weekly market recap, this time featuring my good friend, Michael Lebowitz, co-portfolio manager at RIA. Lance has the week off. Michael, how are you doing?

Michael Lebowitz (1:47)

I'm doing great. Good to be with you, Adam.

Adam Taggart (1:49)

I appreciate that. And we should let folks know we are recording a little bit early this week. Lance is away this week, and you were kind enough to step in, but you are basically bolting to the airport as soon as we're done here. So we're recording this on Thursday, relatively early on Thursday. So folks, we are not going to have whatever action happens between now and the end of the day on Friday. Our apologies for that. This was just the one window of the week that worked for us. That being said, the topics I want to talk to you about, Michael, they're a little bit broader than just the action of these last couple of days.

Bond yields continue to rise here. We just saw the 10-year jump to about 5.1 the other day.

I know you and I have talked about your overall view of bonds and bond yields over the RIA, and you think, sure, they could go up for a bit longer, but you think that bond yields are going to come down, more likely to come down over the next year or two. My question is just assume for a second that they don't, or at least that they keep rising from here for the rest of this year. Is there a point at which things start to crack under yields this high?

Michael Lebowitz (3:05)

Yes.

Depending on what yield you're looking at, they take a while to impact the economy.

Mortgage rates are very slow to impact the economy. We've seen the housing market come to a standstill, but that has a limited impact on the economy. When shorter rates, shorter rates have more of an impact. So when the Fed raised Fed funds, that changed instantly credit card rates, floating rate, corporate borrowing rates. It had an immediate impact. The same, the longer end has an impact, but it just tends to take longer for it to have an effect. So what the Fed has done is said, we haven't seen any impact from higher long-term rates, which will come. It just takes time. So let's raise short-term rates to drive down inflation. Now, that's a really important thing here, right? Because how does the Fed impact inflation? They don't set prices. They certainly don't have anything to do with what's going on in Iran. They don't affect oil, which is driving inflation. So what are they trying to do? They're trying to slow the economy down, right? They're trying to reduce economic activity. So what they are doing will reduce economic activity. And what they're not doing, but having an effect on the long end of the curve also has an impact. So as we sit here at these rates, and even more so as rates increase, that weighing down of economic activity becomes greater and greater. Another great example is corporate bonds. A bunch of companies issued bonds in 2021 when rates were very low. Those bonds come due this year, next year, the year after. As they come due, a corporation's interest rate may go from 2.5% to 6%.