Although we don't believe in timing the market or panicking over daily movements, we do like to keep an eye on market changes -- just in case they're material to our investing thesis.
The Dow Jones Industrial Average (DJINDICES: ^DJI ) on Thursday continued its relentless rise while the bond market continued its sell-off. As of 1:30 p.m. EST, the Dow was up 97 points to 16,455. The S&P 500 (SNPINDEX: ^GSPC ) was up seven points to 1,840. The 10-year Treasury sold off, with the yield rising to 3%.
While the Dow has been rising all year, it has been a different story in the bond market. Bonds have been selling after the first hint of a taper from the Federal Reserve early this summer. The sell-off picked up again last week after the Federal Open Market Committee announced a slight taper of $10 billion to its monthly bond-buying program. This means the Fed will only purchase $75 billion a month of long-term assets, not counting the reinvestment of proceeds from its investments that are running at $15 billion-$20 billion a month. The central bank's move was largely symbolic, as the difference between an $85+ billion program and a $75 billion+ program is negligible.
As such, the bond market has continued to sell off, as shown by this chart updated to Tuesday. The 10-year Treasury's yield is teetering between 2.99% and 3%, while the yield on the 30-year mortgage rate rose to 4.51%.
The risk from rising rates is twofold. Stocks look less valuable compared to bonds as interest rates rise. Also, companies with debt that need to refinance will face higher interest payments, which would greatly cut into their income. This would affect smaller companies more than larger ones, as some of the largest companies in the U.S. are hoarding billions in cash, slowing the economic recovery.
One company that has been exemplary with its capital allocation, investing intelligently and returning excess cash to shareholders, is today's Dow leader. ExxonMobil (NYSE: XOM ) is up 1.60% to $100.81. Exxon is one of the cheapest Dow stocks, with a P/E of 10. Its undervaluation and the risk of rising oil prices was enough to persuade Warren Buffett to buy $3.4 billion worth of the company earlier this year.
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