For Wall Street traders, when should they focus on investing in US stocks? When should they diversify funds into overseas markets? The answer may lie on a very familiar chart: the 10-year US Treasury yield.

DataTrek Research's data shows that the US Treasury yield has significantly impacted the performance of US stocks compared to stock markets in other parts of the world this year.$S&P 500 Index (.SPX.US)$The increase this year is significantly higher than the overall increase in non-US markets.

Nicholas Colas, co-founder of DataTrek Research, stated in a report released on Tuesday that it is the most important driving factor for global stock dollar marginal returns this year. This correlation is very clear. As shown in the following figure: $U.S. 10-Year Treasury Notes Yield (US10Y.BD)$ is the most important factor influencing global equity dollar marginal returns this year. This correlation is very clear, as shown in the graph below:

When the yield of 10-year u.s. treasury notes is rising or stable, u.s. stocks outperform other global markets, while when the yield of u.s. treasury notes is falling, stocks in other parts of the world perform better.

DataTrek tracked this relationship in the chart: in the first three months of 2024 and in the fourth quarter ending in November, when the yield of 10-year u.s. treasury notes rises, u.s. stocks represented by the s&p 500 index generally outperform stock markets in other parts of the world. Colas also found that in the second quarter when the yield of u.s. treasury notes remained high, the performance of u.s. stocks also outperformed stocks in other parts of the world.

When the yield of 10-year u.s. treasury notes falls in the third quarter, the performance of u.s. stocks is surpassed by stock markets in other countries around the world. Colas measures the performance of stock markets in other parts of the world using the MSCI All Country (excluding the usa) Index.

So far this quarter, the yield of 10-year u.s. treasury notes has been rising, closing at about 4.2% on Tuesday afternoon.

"Investors are clearly concerned that higher yields on u.s. treasury notes will slow global economic growth by pushing up rates in non-u.s. economies, so they favor non-u.s. markets only when yields on u.s. treasury notes fall," Colas said.

Colas also pointed out, "The market believes that rising yields on u.s. treasury notes reflect stronger economic growth in the usa. Non-u.s. markets can only perform well when yields on u.s. treasury notes drop significantly - because this indicates that the gap in economic growth between the usa and other countries is narrowing."

Colas also mentioned finally, "The u.s. stock market is expected to continue to rise from the end of this year to 2025, driven by the optimism brought by the current election. Even though interest rates remain high, the performance of the u.s. economy is still better than that of other countries, both of which solidify the reserve currency status of the u.s. dollar."

Editor/rice