- The stock market is hovering near record highs after getting a boost from Donald Trump's election win.
- Bonds, meanwhile, have seen a sharp sell-off since the election.
- Investors looking for signs of Trump-trade fatigue should watch the 10-year Treasury yield, JPMorgan says.
With market enthusiasm around Donald Trump's presidential election victory pushing stocks and crypto to record highs. JPMorgan says investors looking for signs of rally fatigue should be watching the Treasury bond market.
In new research, the firm's equity-strategy team pinpointed the 5% level on the 10-year Treasury yield as a possible inflection point for US equities. It is currently trading at about 4.3%.
"We think that around 5% the impact of bond yields on equity valuations starts to turn, from positive/reflationary one, into the rising concerns over the sustainability of the upcycle and the increasing risk of accidents," the team, led by head of global equity strategy Mislav Matejka, wrote on Monday.
Government-bond yields went on a tear following Trump's win on expectations that the president-elect's immigration and protectionist trade policies would drive inflation, forcing the Federal Reserve to rate rates. The 10-year note surged as much as 21 basis points to 4.47% on November 6, the day after the election.
Adding to upward pressure on bond yields is the prospect that so-called "bond vigilantes" could register their displeasure with a ballooning federal deficit by selling Treasurys.
"If the Trump administration runs excessively stimulative fiscal policy, with lots of spending and tax cuts, leading to even wider deficits, I think then that may cause the bond vigilantes to push yields up to levels that create problems for the economy," Ed Yardeni, the president of Yardeni Research, told DealBook on November 9.
In the absence of a move above 5% in the 10-year Treasury, JPMorgan says the market's near- to medium- term direction will be dictated by which policies Trump prioritizes.
JPMorgan sees struggles in stocks if the elect's second term kicks off with immigration curbs and higher tariffs. Meanwhile, Trump focusing on tax cuts would be a stocks-positive outcome, the firm said.