Stocks could plunge another 25% if this happens, warns Goldman Sachs

By Shawn Langlois, MarketWatch

You might not know it from Friday's strong market rally, but the prospect of rising rates still hangs over investors' heads, after the 10-year yield, at one point, knocked out a four-year high.

The 3% line, which is within spitting distance, is the level that's often thrown out there as a troubling hot spot for equities.

"The best S&P 500 returns have occurred when the 10-year Treasury yields has ranged from 2% to 3%, particularly when yields have been rising," writes Bank of America Merrill Lynch's Savita Subramanian. "While average historical stock returns remain positive until interest rates cross above 6%, the probability of losing money begins to increase as interest rates cross above 3%."

But Goldman Sachs, in our call of the day, is looking at the potential 4.5% level by year-end and the damage it would do to equities. The bank's base case is for 3.25% by the time 2019 arrives - but Goldman isn't counting out the possibility of a much more dire outcome for the market.

"A rise in rates to 4.5% by year-end would cause a 20% to 25% decline in equity prices," Goldman economist Daan Struyven says in a note highlighted by Bloomberg. Such a hit would bring the S&P down as low as 2,155.

Of course, not everybody sees it that way. The Fly, the anonymous blogger behind the iBankCoin blog, calls Struyven's report "asinine." He says that there's a better chance of "a gigantic asteroid striking the planet rendering all life obsolete" than there is of the 10-year jumping to 4.5% in that time frame.

The Fly had some other choice words for Goldman's take and the dummies reporting on it (me, for instance), but we'll stick to the ones we don't have to bleep out: "These notes are designed to shake people upside down until their money drops out of them, permitting Daan's employers to gobble it all up like Noo-Noo."

From MarketWatch