Real Yields, TSLA & PYPL Make the Market

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Real Yields, TSLA & PYPL Make the Market

Published 11/9/21

Two “Data” topics today:

#1: Real US interest rates. There have been only 2 periods since the early 2000s when real 10-year Treasury yields (nominal minus expected inflation) were continuously negative for a noticeable stretch of time:

  • The first was the 500 days between January 24th, 2012 and June 7th, 2013.
  • The second is right now, with negative real yields every day since March 23rd, 2020, totally 597 days as of today.

This chart, showing real 10-year Treasury Inflation Protected Security yields back to 2003, highlights not just those timeframes but also the current scale of the issue. Real yields today are -1.09 percent, lower than the -0.86 percent which marked the bottom in December 2012.

Now, that sudden rise you see in the middle of the chart (May-June 2013) was the famous “Taper Tantrum”. Then-Fed Chair Bernanke started that move with some off the cuff remarks at a Congressional hearing on May 22nd about when the central bank might start reducing its bond purchases. That was all markets needed to hear, and real yields quickly flipped positive.

But look at the right side of the chart – the last 20 months up until today – because, despite the Fed announcing its tapering plans, real yields remain below -1.0 percent. This, in essence, is why 10-year Treasuries are yielding less than 1.5 percent on a nominal basis. Last week we called out that level as important and said we wanted to see yields rise above 1.5 pct to confirm the market’s confidence in continued economic recovery.

Last year, when yields were even lower than now, we made the comment that the US Treasury market is essentially the world’s favorite parking lot for capital. It’s well lit, easy to get into and out of, conveniently located, and the attendants never ding your car, let alone lose it. If you have the money (and asset owners, by definition, do), you will always use that garage. Anything else would cause unnecessary stress at best and might result in damage to your car/assets at worst.

Takeaway: we probably shouldn’t be surprised that the Treasury parking lot still has cars lined up out the front door with capital happy to “pay” the negative yield for peace of mind. First, there is still a lot of liquidity in the system and much of it doesn’t move around very much so it needs a reliable “garage”. Second, the 2013 taper tantrum and rise in real yields came +4 years after the 2009 lows; plenty of time for investors to get comfortable moving capital to riskier assets. We’re scarcely 18 months from the 2020 lows now and, with a myriad of uncertainties about 2021, some capital clearly wants to stay safely parked. The bottom line here is that we still believe it would be a positive signal if nominal 10-year rates held above 1.5 percent, but that may take until next year.

#2: The S&P 500 was down 0.35 percent today, and it was all due to just 2 stocks:

  • Tesla fell by 12.0 percent during regular trading hours. At 2.36 percent of the S&P 500, that equates to a 28 basis point drag (-12.0 times 0.0236) on the index.
  • PayPal was off 10.46 percent today. At 0.67 percent of the S&P 500, that is a 7 basis point drag (-10.46 times 0.0067).

Now, you might be thinking “oh, that’s just the S&P 500…” but in fact the notion that 2 stocks can make a difference broadly applies to the MSCI All-World Index (the ACWI ETF) as well:

  • Today’s ACWI return: -0.25 percent
  • Tesla is 1.35 percent of ACWI, so its 12.0 pct drop was worth 0.16 percent to the index.
  • PayPal is 0.37 percent of ACWI, so its 10.46 percent decline was worth 0.04 to the index.
  • Combined, Tesla and PayPal were responsible for 80 percent of the drop in the aggregate value of global stocks today.

If you are wondering how US retail investors responded to the declines in 2 closely watched names, here’s the answer courtesy of Fidelity’s retail brokerage platform:

  • Tesla’s stock saw just over 51,000 orders (most traded name on the platform, very high order count as compared to a normal day), with 68 percent being “buys”.
  • PayPal saw just over 39,000 orders (second most traded name, also quite high as compared to a typical day), with 77 percent being “buys”.
  • The third most-traded name, Roblox, had just less than 20,000 orders. The stock was up 42 percent today, and “sells” were 62 percent of total orders. Yes, retail investors know how to take profits.

Takeaway: today was a great case study in 1) how systematically important US “Big Tech” and its slightly smaller brethren have become to US and global equity returns and 2) the benefits of having a “buy the dip” retail investor base involved in these names. Yes, some would argue that their involvement has helped push valuations higher than they would otherwise be. Fair enough. What’s important just now, however, is that they continue to show up when their favorite names have a tough day. That is clearly still happening.