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What’s going on with the 10-Year Treasury yield’s shocking decline? Shouldn’t rates be climbing as inflation rises? As legendary investor, Louis Navellier, writes below, “(the collapsing 10-Year yield) as inflation has surged has raised questions about just how much quantitative easing the Fed is doing, since there seems to be almost an institutional panic to buy higher yields.” In today’s Digest, let’s look at this dynamic through Louis’ eyes. It turns out, Louis finds what’s happening to be a huge tailwind for stocks…even though August could bring volatility. From his Thursday issue of Market 360:
But why exactly? That’s what you’ll find out today. I’ll let Louis take it from here. Have a good weekend, Jeff Remsburg |
Why the Decline in Treasury Yields Is Bullish for Growth Stocks
By Louis Navellier
The Federal Open Market Committee (FOMC) shrugged off fears about the economic impact of rising pandemic cases and maintained the course Wednesday by keeping interest rates between zero and 0.25% through 2023.
The Fed will also continue its quantitative easing program of $120 billion per month. Specifically, it will continue to purchase $80 billion in Treasury securities and $40 billion in mortgage-backed securities.
“What we’ve seen is with successive waves of Covid over the past year and some months now, there has tended to be less in the way of economic implications from each wave,” Fed Chair Jerome Powell said during his press conference following the FOMC statement. “We will see if that is the case from the delta variety.”
The FOMC also noted the economy has continued to grow and maintained that recent high inflation is temporary and will recede once issues related to a clogged supply chain, prices for specific goods (like used cars) ease and normal economic demand returns.
Now, the shocking decline in the 10-year Treasury bond yield — it’s currently at 1.26% — as inflation has surged has raised questions about just how much quantitative easing the Fed is doing, since there seems to be almost an institutional panic to buy higher yields. It’s why Corporate America continues to sell record amounts of new debt at ultra-low yields and junk bonds (BB or lower) now yield more than inflation for the first time in history.
One worry is that negative interest rates are here to stay and spreading. For instance, the U.K. fought the negative interest rate influence from the European Central Bank (ECB), but its bond yields are falling and may eventually be in negative territory. This is the conundrum that the Fed is now in, since as foreign investors flock to the U.S. seeking real bond yields, they are inadvertently pushing Treasury bond yields lower.
Now, I cannot emphasize enough how bullish the recent decline in Treasury bond yields is for the stock market, especially for my Growth Investor stocks. Currently, my average Growth Investor stock trades at 27.7 times median forecasted 2021 earnings.
That is where price-to-earnings (PE) ratios should be if the 10-year Treasury bond yield was at 3.9%. However, now that the 10-year Treasury bond yield “cracked” the 1.3% level, I can make a valuation argument that my Growth Investor stocks could surge another 200% before they are fairly-valued relative to Treasury bond yields.
Another reason to be bullish that our economy continues to grow. Just this morning, the Commerce Department said GDP rose at a 6.4% annualized pace in the second quarter, just ahead of the first quarter’s 6.3% rate but well below the Dow Jones forecast for 8.4%. The markets blew off the GDP expectations miss this morning, though, with the Dow rising to a new intraday record and the S&P 500 and NASDAQ also rising in early trading.
The fact of the matter is that the U.S. economy is now larger than it was pre-pandemic, helped by government pandemic aid and consumer spending.
Indeed, inflation and continuing port bottlenecks has helped spark consumer demand, so GDP growth is expected to remain strong through the third quarter. In fact, in July, consumer confidence increased to the highest level since February 2020.
Where to Go Now
While I am very excited for what’s ahead for the stock market, I must admit that I’m not a fan of August. The reality is that as the second-quarter announcement season winds down, “air pockets” can all too often materialize and trigger more volatility.
With that said, my Growth Investor stocks remain “locked & loaded” for wave after wave of positive second-quarter sales and earnings.
As an example, my average Growth Investor stock is forecasted to post 57.1% annual sales growth and 55.1% annual earnings growth. However, since my average stock has had their average earnings estimate revised 15.7% higher in the past three months, big earnings surprises are likely. In fact, my average Growth Investor stock had a 33.7% earnings surprise last quarter.
And when millions of new investors are flocking to the stock market seeking yield and inflation protection, it is hard to not be bullish.
I’ll delve further into why I’m so optimistic, particularly about my Growth Investor stocks, in tomorrow’s Growth Investor Monthly Issue for August.
Once you sign up, you’ll also have access to my two newest High-Growth Investment recommendations, both of which earn an A-rating for their Quantitative Grade and A-rating for their Total Grade, as soon as my Growth Investor Monthly Issue for August is released, I unveil my latest Top 5 Stock list and a new Elite Dividend Payer that offers the perfect blend of income and growth. If you’re interested, I encourage you to join me at Growth Investor today.
Sincerely,
Louis Navellier
