The 10-year Treasury is back near 5.26%, consumer confidence is plunging, and stocks remain near record highs. Here’s why that disconnect matters.
KEY TAKEAWAYS
The 10-year Treasury near 5.26% is historically significant. That level was last seen in June 2007, shortly before stresses in mortgage credit began becoming impossible to ignore.
Consumers are becoming considerably more pessimistic. Consumer Confidence fell to 81.9 while the Expectations Index dropped to 63.6, signaling growing concern about jobs, inflation, and the economy.
Main Street increasingly expects rates to stay higher. Nearly seven in ten surveyed consumers expect interest rates to be higher a year from now, even while parts of Wall Street anticipate a less aggressive Fed.
The relative valuation of stocks versus bonds has changed dramatically. A 10-year Treasury yielding above 5.2% compares with an S&P 500 earnings yield of roughly 3.8%, reducing the compensation investors receive for equity risk.
The K-shaped economy helps explain the market disconnect. Asset-owning households continue benefiting from elevated stock prices and cash yields, while renters, borrowers, and would-be homebuyers face much greater financial pressure.
MY HOT TAKES
The bond market and consumers may be detecting economic stress earlier than equities. Stocks can remain resilient for a long time, but elevated valuations leave less room for disappointment if consumer weakness eventually hits earnings.
A 5%+ Treasury yield fundamentally changes portfolio math. Investors no longer need to venture far out on the risk spectrum simply to generate meaningful nominal income.
The consumer deserves more attention than the headline stock indexes suggest. Weakening employment perceptions, high borrowing costs, and elevated inflation expectations could eventually translate into slower discretionary spending.
Today’s biggest market risk may be complacency rather than catastrophe. Equity prices appear to be demanding unusually little additional compensation despite several sources of macroeconomic uncertainty.
High bond yields are both a warning and an opportunity. Existing bondholders have absorbed painful price declines, but new capital can now lock in yields unavailable for much of the past two decades.
You can quote me: “Here’s a little Wall Street secret: when Main Street and the bond market agree, the stock market is usually the last to find out–and the first to pay.”
Up before the sun. You know my routine if you’ve been with me long enough–by the time most of New York is fumbling for the snooze button, I have finished probably two espressos, even watched some local news, and deeply studied the bond market–yes the bond market–that has been trading in Tokyo and London for hours. The rest of the world votes while we sleep–I just like to be there when they count the ballots. This morning, one number stopped me cold. The 10-year Treasury yield is still sitting right around 5.26%.
That number really means something to me. The last time the 10-year closed there was June 12, 2007. I was already well over fifteen years into my Wall Street career–old enough to know better, young enough to still be surprised. I remember the screens. Back then, my ritual still included the bond market check, but instead of two espressos, it was a 1.5 kilometer swim in the cool YMCA pool, followed by a 5 or 10 kilometer run. I remember the mood. Credit was easy, housing could never go down, and everybody was confident. Within just weeks, two Bear Stearns hedge funds stuffed with mortgage securities were melting down. Some numbers you remember like the song that was playing the night everything changed (it was probably “Umbrella” by Rihanna). For me, 5.26% is one of those songs.
Now pair that number with what we learned yesterday. The Conference Board's Consumer Confidence Index fell to 81.9–its lowest reading since 2014. And the stock market? The S&P 500 slipped a whopping 0.17%. Yeah, I have seen bigger moves on a sleepy Friday in August. Here is what I think is going on. Main Street and the bond market are singing the same song–loudly–and the stock market is wearing noise-canceling headphones. Two voices, one story–and a third that isn't listening.
Let's start with Main Street. Economists expected the index to come in around 89.2. Instead, it fell 6.7 points from August's 88.6. That is not a miss–that is a whiff (sorry about the very American baseball terminology, but the shoe fits). The part I watch most closely is the Expectations Index (how consumers feel about income, business conditions and jobs six months from now). It dropped to 63.6, its third straight monthly decline. The Conference Board has long treated readings below 80 as a warning that a recession may be on the way. We are not flirting with that line, my dear friends. We are well below it. And for the first time since September 2024, consumers' view of current business conditions turned negative. People don't just fear tomorrow–they don't much like today.
The job picture is slipping, too. Just 23.6% of consumers say jobs are "plentiful," while 21.9% say they are "hard to get." Wall Street inside tip: watch that gap. At 1.7 percentage points, it's getting mighty thin. Meanwhile, average 12-month inflation expectations climbed to 6.1%, and when asked to write in what worries them, respondents pointed straight at the cost of living and fuel prices. You don't need a PhD to connect those dots (it helps, lol 🤣)–just a receipt from the gas station.
Here is an important point. 68.4% of consumers now expect interest rates to be higher a year from now–up 5.2 points in a single month. On that very same day, New York Fed President John Williams said he sees no urgency to raise rates again, and futures traders cut the odds of an October hike to something close to a coin flip–somewhere between 44% and 50%. So who is the hawk here? Not Wall Street. Main Street.
Now to the bond market, which has been saying the same thing–only louder. The 10-year closed Monday at 5.24% after touching 5.27% during the session. Two weeks ago, on the eve of the Fed's September meeting, it touched 5.04% and made headlines as the highest since 2007. It hasn't stopped climbing since. One more push past 5.27% and we are back to May 2002. The 30-year Treasury closed at 5.56%, and the average 30-year mortgage rate hit 7.20% last week–up from 6.30% a year earlier. If you are trying to buy a first home, the bond market has already delivered its verdict on your budget.
Why? I count four forces. A Fed that is hiking. An energy shock courtesy of a seven-month conflict with Iran, with Brent crude hovering near $105 a barrel. Deficits that keep Washington selling more and more Treasuries. And an AI buildout competing with Uncle Sam for every available investment dollar. Notice something about that list–every single item is also on the consumer's worry list. Prices. Fuel. Rates. The bond vigilantes (investors who sell bonds to protest inflation or government overspending) and American households are reading the same tape. They just express it differently. Consumers answer a survey. Bond investors sell.
And the people who own those bonds are feeling it right on their monthly statements. Five-year rolling returns on the broad investment-grade bond index are now negative for the first time on record. If you are retired and leaning on bonds for income and stability–rightly so–the income has never looked better. The stability just flew out the window. That doesn't do much for anyone's confidence, either.
And then there is the stock market. The S&P 500 set its last record in mid-August, and even after a few soft weeks it sits within a few percent of that high, up double digits for the year. Now look at what investors are paying for that privilege. The S&P 500 trades at roughly 26 times earnings. Flip that around and you get what's called the earnings yield–about 3.8%. In plain English, for every $100 you put into the index, the companies underneath it earn about $3.80. The 10-year Treasury pays you more than $5.20–guaranteed, with no earnings call required.
That gap has a name–the equity risk premium (the extra return investors demand for taking on the risk of stocks instead of safe government bonds). Measured against inflation-protected Treasuries (TIPS), it has shrunk to less than one percentage point. Over the past two-plus decades, the only times it sank lower were a few months during the 2008 financial crisis and a few months during COVID. The long-run average, going all the way back to 1871, is around 3.5%. In other words, stock investors are demanding roughly a quarter of the usual reward for taking risk–at the exact moment consumers are telling us the risk is rising. That's not a market ignoring the song. That's a market that turned the volume all the way down.
How is that possible? Picture the K-shaped economy. On the top arm are households that own stocks, park cash in money market funds earning around 4%, and locked in sub-3% mortgages years ago. On the bottom arm are households filling up the tank, renting, carrying credit card balances, or trying to buy a first home at 7¼%. The confidence survey blends both arms together. The S&P 500 doesn't–it is weighted heavily toward the…er, top.
The top arm is still having a good time. Carnival jumped 11.65% yesterday after beating earnings expectations–the upper arm of the K is, quite literally, still cruising (I couldn’t help that “Dad” joke). 😆 But averages hide fractures right up until the moment they don't. The bottom arm buys the groceries, pays the credit card interest and drives the cars. When it stops spending, the earnings that justify a 26 multiple are the first thing to go.
Today brings the Fed's favorite inflation gauge, the Personal Consumption Expenditures price index. Economists expect core PCE (which strips out food and energy) to hold at 3.3% from a year ago, with a 0.3% gain for the month. That puts Chairman Kevin Warsh squarely in a bind. A cracking consumer argues for patience. Inflation expectations of 6.1% argue against it. Williams says there is no urgency. If core inflation runs hot this morning, "no urgency" may have a very short shelf life. So which one does Warsh blink at–the consumer or the inflation?
None of this calls for panic. It calls for honest questions. How much of your portfolio depends on the bottom arm of the K–retailers, lenders and businesses that need that consumer to keep spending? If a Treasury pays you more than $5 on every $100 with no risk to the payment, what exactly are you being paid to own stocks at $3.80? And if you own bonds, do you know how sensitive they are to rates–and do you intend to hold them to maturity?
Here’s a little Wall Street secret: when Main Street and the bond market agree, the stock market is usually the last to find out–and the first to pay. 😉
I'll leave you with one more memory from that summer. The 10-year printed 5.26% in June 2007. The S&P 500 went on to set a record high that October–four months later. The bond market had already sung the song. Stocks just hadn't heard it yet. I'm not predicting a repeat. The silver lining is real–bonds haven't paid this well in nearly two decades, and for anyone putting new money to work, that is a gift. But tomorrow morning I'll be up before the sun again, espresso in hand, watching Tokyo vote. In 2007, almost nobody listened. This time, I'm listening to every note–thankfully, I don’t need to shimmy into that tight bathing suit.
YESTERDAY’S MARKETS
Stocks slipped yesterday as the S&P 500 fell 0.2%, the Dow Jones Industrial Average fell 131 points, or 0.3%, to 51,349, and the Nasdaq Composite fell 0.1%. The 10-year Treasury yield climbed to 5.25%, and the 30-year yield rose to its highest level since 2002. The Conference Board's Consumer Confidence Index fell to 81.9 in September from 88.6 in August, its lowest reading since 2014.
NEXT UP
ADP Employment Change (September) came in at 90k new hires, beating estimates and last month’s 36k print.
PCE Price Index (August) is expected to have grown by 3.7%, unchanged from last month’s read.
Personal Income (August) is expected to have grown by 0.5% after climbing by 0.4% in the prior period.
Personal Spending (August) probably climbed by 0.9% after gaining 0.2% in July.
Fed speakers today: Barkin, Cook, Goolsbee, and Kashkari.
Important earnings today: FactSet, Jabil, Conagra, and Micron.