The market has been enjoyable since bottoming last March, but let's be real. There is always going to be a tug-of-war between good and bad news as long as COVID is a thing.
Overvalued stocks and complacency is always a risk for this bull market too. However, there's another significant risk that's been crushing high growth tech stocks in these last two weeks—rising bond yields.
So, what does this mean for your investments?
Let's break it down for you
Rising bond yields are a blessing and a curse.
- On the one hand, it shows we're getting back to normal. It also shows that there is pent-up consumer spending.
- On the other hand, if the Fed keeps interest rates this low while bond yields keep rising, you can welcome back inflation. It also means that tech stocks that have boomed, thanks to cheap borrowing rates, will be tested. Hence the Nasdaq's 4.5% decline since February 12.
So do bonds still add value to your portfolio anymore?
The short answer is: yes. Bonds add stability and diversification to your portfolio, especially if you have different types with multiple maturities, as they can generate strong, consistent, and most importantly, predictable profits. You can even calculate these potential gains years in advance too.
And are bonds still uncorrelated to stocks? The short answer is yes, although there are short periods in history when the returns of the two asset classes moved in the same direction (e.g., March of 2020).
Most recently, rising yields have made high-tech stocks look relatively less attractive. But if you look going back a little more than two years, you can see that the Nasdaq index has really taken off as bond yields have fallen.
But buyer beware
By the time bond yields crossed 3% in September of 2018, high-flying tech stocks finally took their cue and sold off, sharply.
For those who were invested, the final quarter of 2018 was not easy to stomach. We’re not saying this is for certain to happen again as bond yields rise, but it is something to be hyper-aware of and to watch closely.
Wall Street says that bond markets are smarter than stock markets when it comes to forecasting. You may want to take heed.
If you are new to investing and or need a crash course on bond basics, take this 6-minute quiz-based lesson: