Here are 3 reasons the stock market can survive rising bond yields in 2021

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Rising Treasury yields have contributed to a sell-off by pandemic stock market high-flights, but it likely won’t be enough to ruin the appeal of stocks over bonds in 2021, according to one analyst. Investors in US stocks “have focused on the recent surge in 10-year Treasury yields over the past week, going back to mid-February 2020 levels,” wrote Lori Calvasina, Chief Strategy Officer. of US stocks in RBC Capital Markets. in a Tuesday note. Yields and bond prices have an inverse relationship.

The TMUBMUSD10Y 10-Year Treasury Yield, 1,349% comes from its biggest rise in six weeks, which has been blamed for causing a pullback led by tech-oriented stocks that had benefited more from the stay-at-home dynamic created by COVID -19 pandemic. Related: Can the Stock Bull Market Survive Rising Inflation and Bond Yields? Here’s What History Says The relationship was turned upside down on Tuesday as rising yields subsided on testimony from Federal Reserve Chairman Jerome Powell, allowing major benchmarks to erase or trim significant losses. The tech-high Nasdaq Composite COMP, -0.50%, which has led the way down, trimmed a loss of nearly 4% to end 0.5% lower as yields declined; the S&P 500 SPX, + 0.13% made a profit to break a five-day losing streak, while the Dow Jones Industrial Average DJIA, + 0.05% erased a loss of more than 360 points to finish slightly higher. Meanwhile, Calvasina said that a look at what stocks offer in terms of dividend and earnings yield relative to bonds, as well as a reminder of what kinds of bond moves have spelled trouble for stocks, offers some security of that 2021 is unlikely to turn into a dividend yield When it comes to dividend yield, RBC measured the percentage of companies that continue to outperform 10-year Treasuries. While that has fallen to 51.5% from 64% at the beginning of the year, it is still within a range typically followed by a 17% gain for the S&P 500 over the next 12 months, he said. it also deteriorated, moving to the lower end of the range in force since the end of the financial crisis. It is now close to the level seen in 2017-18, but remains in a range that has been followed by 9.3% average gains for the S&P 500 over the next 12 months, Calvasina said. “In other words, this analysis recognizes the case for a short-term pullback in the S&P 500, but does not necessarily indicate that longer-term investors should be heading out,” he wrote. Calvasina also highlighted an “important difference” between 2018, when the trade war threatened the economies of the United States and the world, and now, when forecasts for gross domestic product are rising rapidly. itself? After all, many market watchers have argued that while returns are still low by historical standards, it’s the size of the rally that may be most concerning for stocks. Calvasina broke down the relationship between yield movements and stock market performance in the following table:

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RBC Capital Markets

Calvasina said US equities have tended to struggle when the 10-year yield rises more than 275 basis points, or 2.75 percentage points. Coming out of its 0.51% low, a move of 275 basis points would bring the yield to around 3.26%. The 10-year term ended Tuesday at 1.363%.