On the morning of Thursday, Oct. 15, the 10-year Treasury yield sat at 5.06%. It has been making headlines ever since it crossed 5% about three weeks ago. This is viewed by experts as being the most important number in global finance. That’s because it sets the risk-free rate of return that anchors pricing, mortgages, corporate borrowing costs, and valuations across the entire economy.
Besides passing this threshold in late September, the 10-year Treasury yield last closed above 5% on July 19, 2007. Almost 20 years have passed since investors have seen it at this level. When rare events like this occur, it might be time to pay attention to what’s going on.
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Markets are extremely complex and interconnected, and the current situation might affect your portfolio. Investors naturally want to know what comes next for the stock market, and history says this is how the S&P 500 index could perform in the coming 12 months.
Drawing parallels to a different era
Over the 12 months following July 19, 2007, the popular stock market benchmark fell 19%. And over the subsequent five years, it was down 11%. This might draw a pessimistic outlook from investors.
In the four years leading up to it closing above 5% on that date in July 2007, the 10-year Treasury saw its yield rise 26%. This was supported by the Federal Reserve aggressively hiking the fed funds rate. The U.S. economy was registering strong growth, and one of the goals was to get ahead of above-average inflation.
That backdrop mimics what we see today. Just in the past 12 months, the 10-year Treasury yield has soared 26%. The central bank has started to raise rates due to stubborn inflation. And as was the case in July 2007, the S&P 500 is currently in all-time record territory and in the middle of a multiyear bull run.
After looking at the parallels, investors might have a gloomy view.
Why this time could be different
However, there are some important differences that shouldn’t be ignored. After 2007, stocks performed poorly because of the onset of the Great Financial Crisis. Banks loaded up on risky subprime mortgages, packaging them into complex securities that were sold to third-party investors to raise capital to lend even more. This contributed to the real estate bubble popping, which rippled through the financial system.
