Stunning correlation between the 10-year and S&P 500 could point to new highs for stocks

    The bond market is celebrating a milestone. Two years ago this month, the 10-year Treasury yield bottomed out at a once-in-a-generation low of 1.36 percent.

    Since then, the yield has more than doubled to around 3 percent.

    Against common thinking, one strategist says this is not necessarily a bad thing for stocks.

    “What have we heard, though, really for two years? Higher rates are worrisome and it’s a concern for stocks,” Ryan Detrick, senior market strategist at LPL Financial, told CNBC’s “Trading Nation” on Tuesday. “But when you take a look at history, that’s not the case.”

    During the 23 times the 10-year Treasury yield rose since the early 1960s, the S&P 500 moved higher more than 80 percent of the time.

    “Even more significantly, since 1996 (so more recently) 11 periods with the higher trending 10-year yield, every single time, all 11 times, the S&P 500 also went higher,” added Detrick.

    Of those 11 times, the S&P 500 rose by an average 9.5 percent, according to LPL Financial research. Since the 10-year yield hit its multiyear low in July 2016, the S&P 500 has risen roughly 34 percent.

    “Should the 10-year break out above 3 percent to new highs, that could be a surprise for a lot of people, it could be really bullish for the S&P 500 going forward,” said Detrick.

    Investors’ concern over a flattening yield curve is also not as damaging to stocks as common wisdom suggests, says Detrick.

    “The last time we saw yields going higher with the yield curve flattening was the mid-90s,” he said. “We’re not going to have an inverted yield curve any time soon in LPL Financial’s point of view. It could stay flat potentially for a couple of years, kind of like those mid-90s, and the economy could continue to grow along with stock prices.”

    An inverted yield curve, typically seen when a bond with a shorter-term maturity has a higher yield than the 10-year, is often interpreted as a sign of an impending recession. The 2-year/10-year yield curve inverted in May 1998 and it was 22 months and a gain of nearly 40 percent before the S&P 500 hit its peak, according to LPL Financial.

    The 2-year/10-year yield curve was 32 basis points wide on Tuesday. The spread hit a multiyear low of 24 points earlier this month.

    Not a Scientific Survey. Results may not total 100% due to rounding.

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