The stock market is feeling the pinch from escalating interest rates and crude prices, prompting a division within CNBC’s Investment Committee. While Steve Weiss is opting to build up his cash reserves, Jim Lebenthal prefers to remain fully invested.
The panel of money managers on CNBC’s Halftime Report discussed portfolio strategy as Brent crude and Treasury yields both moved upward.
What Rising Rates and Oil Prices Do to Stocks
On Monday, the 10-year Treasury yield reached 5.27%, marking its peak since 2007. Meanwhile, Brent crude, the international benchmark for oil, moved past $105 per barrel.
This dual pressure impacts equities across three distinct areas.
- Valuations: Higher yields make bonds more competitive and lower what investors pay for future earnings.
- Rate-sensitive sectors: Real estate, utilities, consumer discretionary and financials tend to feel higher borrowing costs first.
- Inflation: Costly energy can keep the Federal Reserve’s policy tighter for longer.
How the Investment Committee Is Positioned
Such market dynamics have prompted the CNBC investment committee members to adjust their portfolios differently as they navigate a challenging environment. Weiss parted ways with Cisco (CSCO) and reduced his stake in Meta Platforms (META). He currently maintains a cash allocation of roughly 25% and notes that percentage may increase.
Meta shares dropped 4.8% on Monday following a gain of nearly 13% during the preceding week.
“But look, there is no reason for the 10-year yield to come down.”
Steve Weiss, founder and managing partner of Short Hills Capital Partners, on CNBC
He views 5% as a support level for the 10-year yield and anticipates a clear trajectory toward 6%.
Weiss contends that yields lack a catalyst to decline while oil prices remain elevated, noting that Iran has every incentive to drive crude higher. He sees no incentive to deploy cash into equities unless they present unmistakable bargains.
Conversely, Lebenthal of Cerity Partners maintains that corporate earnings can propel equities upward. He points out that the market’s forward earnings multiple has contracted from approximately 22 down to 18.5 this year, yet maintains that current earnings growth supports that valuation.
Another committee participant highlighted distinct downward trends across real estate, utilities, consumer discretionary, and financial equities, noting that numerous market participants had anticipated oil prices would decline prior to the midterm elections.
What Could Change the Picture
Crude serves as the primary variable, and ongoing discussions to reopen the Strait of Hormuz have not yet yielded an agreement. Nevertheless, a decrease in oil prices could alleviate market strain.
David Spika, a strategist at Turtle Creek, anticipates a 5% to 10% advance for stocks by the end of the year if oil continues its descent. Tom Lee of Fundstrat suggests that elevated borrowing expenses weigh most heavily on weaker firms.
The upcoming earnings reporting period will determine whether corporate profit growth can compensate for a 10-year yield sitting above 5%.