Why buy stocks with such high returns?

The U.S. Treasury building under renovation on Tuesday, Aug. 15, 2023, in Washington, U.S.

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

Naked markets
While the Nasdaq Composite still managed a small gain, US stocks retreated on Tuesday after Monday’s gains. Asia-Pacific markets were mixed on Wednesday. Japan’s Nikkei 225 rose about 0.3% as the country’s business activity expanded faster in August than in July. However, the Shanghai Composite fell 0.68% as China’s economic woes continued to weigh on it.

Malaysia’s electric car ambitions
Malaysia was able to convince Tesla to set up its regional headquarters in the country, the first agreement under the country’s Battery Electric Vehicle Global Leaders initiative. But Malaysia wants to play a bigger role in the global electric vehicle supply chain. “Home is our priority,” Malaysian Prime Minister Anwar Ibrahim told CNBC’s Martin Soong in an exclusive interview.

Budget busting pork
Pork prices are up more than 100% year to date, from 131.59 cents a pound in January to 270.89 cents a pound at the end of July. That’s just 9 cents away from the all-time high in August 2021. Analysts believe the increase is partly due to California’s new animal welfare regulation that took effect on July 1.

Fukushima water discharge
Japan plans to release about 1.3 million metric tons of treated radioactive water from the tsunami-ravaged Fukushima nuclear plant into the Pacific Ocean. Although China accused Tokyo of being “extremely selfish and irresponsible”, scientists and the International Atomic Energy Agency said the radioactivity in the water was insignificant.

(PRO) Stocks weren’t afraid of the slowdown
Neither persistently high interest rates nor slowing global growth can halt the sector’s trajectory, which grew by 12.5% ​​in the first quarter compared to a year ago. These are the two stocks fund managers recommend buying to take advantage of the sector’s “secular story, long-term story.”

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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