The S&P 500's annual profits are now about 4.3 per cent of the index's price.
His promises for big corporate tax cuts helped lift the Dow more than 8,000 points, though it has since given back about a fifth of that surge. Still, the rise in bond yields has narrowed the spread to the smallest in eight years. Relative to yields, Treasuries now trade at roughly 37 times the annual interest payout, which in a rough sense might be considered their earnings. Consider this: The S&P 500 has risen or fallen 1% five times in the past two weeks. A rise in Treasury rates to about 4.3 per cent would leave the ratios even.
Ken Mahoney, president of Mahoney Asset Management, said he has been hearing from clients this week who were surprised by the struggles for bonds.
End of a Bull Market, or Nowhere Near?
"The simplest way to look at it is, everything is relative".
"Over the last half a dozen of years we have been saying equity valuations can be higher because we are living in a low interest rate and low inflation environment but that's reversing a little bit and that's what we are staring at now", said Art Hogan, chief market strategist at B. Riley FBR in NY.
Overseas market jitters mostly eased after plunging earlier this week.
A related concept is net present value. The job market remains healthy, as evidenced by a report Thursday that applications for unemployment benefits are at a 45-year low.
US stocks began to wobble last Friday after a healthy USA labor market report sparked a spike in bond yields and fears of rising inflation.
"This is the beginning of more meaningful setback in a market that was, at least from the nonfinancial sectors, very overvalued and there was a lot of euphoria", said Jonathan Garner, a global emerging market strategist at Morgan Stanley. "The links are always tenuous and squishy at best".
The Dow Jones Industrial Average .DJI fell 1,175.21 points, or 4.6 percent, to 24,345.75, the S&P 500 .SPX lost 113.19 points, or 4.10 percent, to 2,648.94 and the Nasdaq Composite .IXIC dropped 273.42 points, or 3.78 percent, to 6,967.53.
The 10-day correlation between the S&P 500 index and yields on the 10-year note stands at a negative 0.79. Traders were bored out of their minds for much of 2017, when Treasury yields fluctuated within the tightest range in a half-century.
But there's a point where the "signal" leaves the abstract and becomes a drag on earnings. A higher fiscal deficit forces the government to go for higher market borrowings. Rock-bottom financing costs have been a boon to earnings for a decade, a period in which the Federal Reserve has held rates near zero.
Volatility remained high compared to recent months.
"We've just given back some recent gains, not wiped out anyone's life savings". And the more bond yields rise, the more will be this opportunity cost. "There is an emerging inflation story in the USA - and rising U.S. inflation makes monetary policy less predictable". Looking at days last week, a rally that looked bulletproof around noontime Wednesday fell to pieces after policy makers added one word - "further" - to their outlook for the pace of tightening. The correlation between German and U.S. 10-year notes stands at north of 0.6.
However, rising bonds does not always lead to poor equity performance. Buying a house gets more expensive, credit cards bite harder, consumer confidence takes a hit.
The index that many traditional bond funds measure themselves against, the Bloomberg Barclays U.S. Aggregate, has had one loss in the last eight quarters. So, what asset classes are worth investing in right now? The firm manages US$179 billion.
The turmoil claimed fresh losses in Asia and Europe on Monday, with traders fretting that a resurgent United States economy will lead to rapid interest rate rises by the Federal Reserve. Growing confidence in the current synchronised global economic expansion, the inflationary impact of U.S. stimulus and expectations of higher wage pressures have contributed to investors' reassessing central bank policies and longer-term inflation expectations.