Why buy stocks when the yield is so high?

Tuesday, August 15, 2023, at the US Treasury Building in Washington, DC.

Nathan Howard | Bloomberg | Getty Images

This report is from today’s CNBC Daily Open, the new, international markets newsletter. CNBC Daily Open brings investors up to speed on everything they need to know, no matter where they are. As you see? You can subscribe here.

Things you need to know today

Markets lost momentum
While the Nasdaq Composite still managed a small gain, US stocks retreated on Tuesday after Monday’s gains. Europe’s Stoxx 600 index increased by 0.68%. French game publisher Ubisoft Entertainment was lifted by 8.51% after Microsoft said the company would lose the rights to several games as part of a new deal to buy Activision Blizzard.

Coinbase buys stake in Circle
Cryptocurrency exchange Coinbase is buying a stake in Circle, the company that issues and manages the USDC stablecoin. A stablecoin is a cryptocurrency pegged to a traditional currency such as the US dollar; in other words, one USDC is equal to 1 dollar. The two companies also said they would close the Central Consortium, the private management organization for the USDC. Here’s what the pros think Coinbase’s move means.

Baidu increases marketing revenue
Baidu’s shares traded in the US rose 2.75% The Chinese technology company reported earnings that beat expectations. Revenue in the June quarter rose 15% year-on-year to 34.1 billion yuan ($4.7 billion), about 1 billion yuan above estimates. This was supported by 15% growth in online marketing revenue and 12% growth in offline marketing segment.

The next prime minister of Thailand
Pheu Thai Party’s Srettha Thavisin will become Thailand’s next prime minister after the real estate tycoon won 482 votes in the country’s bicameral National Assembly. Controversially, Pheu Thai formed a coalition with pro-military parties, leaving out the Forward Movement party. The Forward Forward party came first in Thailand’s elections, but its leader Pita Limjaroenrat failed to win a majority in the assembly.

(PRO) Now is the time to buy the term
The yield on the 10-year US Treasury is at its highest level since 2007. While that means lower bond prices — since prices fall as yields rise — Charles Schwab thinks now is a good time for traders to add to their fixed-income portfolios.

Bottom line

At 4,332%, the 10-year Treasury yield hit a 16-year high. It represents a risk-free, long-term, relatively high-return, market-weighted asset. The logic goes like this: Why should traders invest in stocks that may not return as much or even slightly more when there is an asset class that guarantees a 4% return?

“Cash is now yielding 5% in the States, short-term bonds are yielding 5% plus, so for the first time in a long time, stocks have real competition,” Rupert Thompson, chief economist at Kingswood Group, told CNBC.

Typically, stocks—if they’re doing well—tend to yield more than a risk-free asset because certain stocks won’t go up. This is called the equity risk premium, this return is supposed to compensate equity investors for the chance of losing money. But, as CNBC Pro’s Bob Pisani points out, the premium is currently below 1%. Historically, it has been between 2% and 4%. In other words, stocks look less attractive than Treasurys.

Another potential problem, which could result in higher Treasury yields, could make the job of the Federal Reserve more difficult. Torsten Slok, Apollo’s chief economist, warned that “long rate hikes are actually a bit more difficult in terms of getting the economy into a soft recession.” “While the Fed can control short rates,” a rise in long rates could pose “significant risk” to the economy, such as Fitch’s recent downgrade and quantitative tightening.

It was no surprise that stock markets fell on Tuesday. The S&P 500 It decreased by 0.3% and Dow Jones Industrial Average It lost 0.5%. However Nasdaq Composite rose 0.06% to avoid two straight days of losses Nvidia fell 2.9% ahead of the earnings report.

But don’t panic. “We’re in a bull market pullback,” said Adam Turnquist, chief technical strategist at LPL Financial. That said, it is still too early for stocks to fall. Indeed, Yardeni Research president Ed Yardeni told CNBC that he thinks “the market is going to stay there” — and “a rally later in the year will bring the S&P 500 back to something like 4,600.” That implied an almost 5% rise in stocks — though not a certainty — that would certainly give Treasurys a run for their money again.

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