Strategic Investment Approaches with 10-Year Yield at 5% With A Look at Unique Bull Market Factors

October 25, 2023

The last four bull markets we have seen began with the “low’s” of October 1990, October 2002, March 2009, and March 2020 – ALL STOCKS WENT UP. For the current 2023 bull run, only 2/3rd of the S&P 500 have risen. Half of these gains came from 8 stocks in comparison with 38 stocks leading off previous bull markets. Also, what kicked off our current bull market this year- the tech sector- is usually what signals the end from previous bulls. Essentially, we may be looking at a bounce in a bear market since 2022.

Another interesting fact is that in previous bull runs, it was banks that led the markets up. This year due to rising interest rates, there was a run on the banks- and they kept on failing. But just because this doesn't look familiar- doesn't mean we are stopping the bull. But, it begs a pause for some optimists.

Investors face a pivotal choice as U.S. government debt yields peak, driven by a backdrop of historically low interest rates and the Federal Reserve's extensive monetary interventions post-2008. This period of ultra-cheap money saw tech booms, venture capital surges, and speculative frenzies, but bonds are now resurging, offering their highest yields since 2007. As the Fed embarks on one of its fastest tightening phases in decades, the allure of fundamental investing is on the rise, though Wall Street anticipates an atypical market climate.

Amid the Fed's efforts to combat inflation through interest rate hikes and the government's economic stimulation, the looming federal deficit is a pressing concern. With higher rates and increased spending, net interest on federal debt surged by 34%, resulting in a record $1.6 trillion budget shortfall. Nonetheless, some investors argue that the U.S.'s long-term prospects, including population growth and productivity, still make American stocks attractive.

For investors, it is important to view big picture and there are several ways to respond to these dynamics with diverse strategies such as:

Remain optimistic about U.S. stocks and adopt a long-term view and avoid short-termism.
Embrace a back-to-basics approach, focus on bonds and traditional stocks due to the government's spending spree.
Take caution against generalizing the tech sector and note the resilience of cash-rich tech giants.
Do not hastily react to shifting interest rates and explore non-traditional investments.
Express confidence in the bond market, particularly in high-quality, short-term bonds as the Fed's rate cuts are expected to boost prices.