June was the worst month for bonds in 50 years, as the 10-year Treasury yield (^TNX) surged to 2.7%. And as much as that move wreaked havoc in stock and bond portfolios, the latest housing data seems to show it was more of a hitch than a ditch, as existing home sales slipped just 1.2% from the month before.
So far, with stocks setting fresh record highs daily, and housing proving its ability to handle rising rates, it begs the question, when will increased borrowing costs really begin to take bite?
"In my judgment, as I do the numbers, when we get to about a 3% yield on a 10-year Treasury, then we're going to start to see some problems; problems for the stock market and also problems for the economy," says Hugh Johnson, chairman and CIO of Hugh Johnson Advisors, in the attached video.
This from a veteran strategist who recently wrote to clients that "the biggest risk now is interest rates and the Fed knows it."
Perhaps it's that latter point that has kept things in check, with about a quarter of the June swoon already being reversed. It has created a scenario where Johnson, and many other pros are of the mind that the worst is over for rates and that fear of the Fed tapering its monthly bond buying program are fully discounted.
"In my view that is absolutely the case," Johnson says, before clarifying his prior cautious comments. "I'm not saying (3%) is the kiss of death or the end of it, but I am saying that's the time that you've really got to get on your toes and watch carefully for all those signs that tell us the current cycle is about to end."
In addition, Johnson is on watch for a performance shift that would show defensive stocks taking the lead again, with large caps outperforming small caps and sectors like Staples (XLP) and Utilities (XLU) and Telecom taking the lead, as well as any signs of a downturn in the Conference Board's index of Leading Economic Indicators.
Until that happens, he says investors should continue to own stocks with cyclical exposure to an improving economy.
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