In our last missive we spoke of yields and their effect on stocks: If interest rates go higher, the better yields offer competition against the purchase of stocks, and therefore the stock market falls. This relationship has been in existence for, well, forever.
Another relationship that has been in existence forever on Wall Street is the moving of the goal posts. For example, analysts make predictions that when a certain metric is reached, the markets will drop. But when that prediction comes close to being true, the same Wall Street analysts will just change the metric, or the line in the sand that will spell trouble for equities.
That leads us to today. Every bank analyst on Wall Street, including Goldman Sachs (GS), has been saying for years that if the 10-YR yield reached 3.00%, all hell would break loose in the markets. Now that the 10-YR is very close to 3.00%, Goldman Sachs (and probably many more) has changed the metric as what will be bad for equities. GS has moved its goal post to 4.50%.
Suddenly higher rates are “good” for the markets as somehow it “proves” the economy is strong. In a recent note to its clients, Goldman said the following – “a rise in the 10-year yield to 4.5% by end-2018 would cause a sharp [economic] slowdown” while “a rise in rates to 4.5% by year-end would cause a 20-25% decline in equity prices.”
Now that the 10-YR yield is dangerously close to 3.00%, Goldman Sachs and all other banks are doing anything they can to keep their clients from selling equities. Will it be enough to stop another sell off? We will find out in less than 100 basis points.