Interest-rate volatility could be a real stinger for U.S. stocks, and investors may be ill-prepared to handle potentially steep declines, according to a wealth manager.
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U.S. stocks could see 30 to 40 percent slide over time, according to Rainer Michael Preiss, executive director at Taurus Wealth Advisors. He did not specify a timeline for such a correction to happen.
Preiss argued on CNBC’s “Capital Connection” on Tuesday that his view is not pessimistic.
“I would rather use the word realistic,” he said. “Don’t forget that we are (at a) late stage cycle. Everybody has been conditioned to buy the debt. That was the right strategy; it was a bit like the analogy, the narrative, that equities are cheap because bonds are even more mis-priced.”
He explained that there are signs of potential re-adjustment in the fixed income markets that over time would likely lead to a higher cost of capital.
An environment where there is both monetary and fiscal stimulus could be inflationary, he said, adding that a 3 percent yield on the 10-year U.S. Treasury note is considered “the line in the sand” for more re-pricing in the global financial market.
Preiss added that investors are nervous that further increase in bond yields could lead to correction in equities and in corporate debt.
The 10-year Treasury yield started the week on a tear, jumping to 2.99 percent and toying with the key 3 percent level — that points to signs of increasing inflation amid signals from the Federal Reserve that more rate hikes are to come this year.
Still, some analysts said that a 3 percent or higher 10-year Treasury yield isn’t enough to cause a meltdown in the stock market.
Preiss added that investors could be spooked if certain parts of the U.S. economy slow at the same time that interest rates are rising.
“That is basically a more challenging outlook for corporates,” which already carry a great deal of debt, he said.
“That’s why increasingly … it’s important to have a look at portfolio construction and potentially reduce passive ETF exposure,” he said, referring to exchange-traded funds.
— CNBC’s Thomas Franck, John Melloy and Alexandra Gibbs contributed to this report.