Highlights
• Equity investors question if an increase in yields could spell the end of the current bull market.
• While improving economic growth and other factors are likely to put upward pressure on interest rates and inflation, we think equities should remain resilient.
• Investing conditions are growing more difficult, and investors may need to adjust to an environment of diminishing returns and diminishing breadth across markets.
Thanks to a rally on Friday, U.S. stocks advanced as the recovery from the early February correction continued. The S&P 500 Index was up 0.6 percent, with technology posting particularly solid gains and consumer staples struggling.1 The bond market has been drawing more attention lately as yields continue to rise. The 10-year Treasury yield ended the week below 2.90 percent after hitting a four-year high of 2.95 percent.1 In other markets, the dollar and oil prices posted gains while gold lost value.1
Weekly Top Themes
1. Bond yields are likely to continue rising. Interest rates are feeling upward pressure from accelerating U.S. and global economic growth, rising inflation expectations, tightening Federal Reserve policy, the Fed’s unwinding of its balance sheet and additional fiscal stimulus from tax cuts and spending.
2. We don’t believe yields will rise to the point of derailing the equity bull market. Equity investors are rightfully focused on rising rates and many are wondering if and when higher bond yields could trip up the stock market. In our opinion, stocks should be able to weather a slow rise in interest rates to around 3.5 percent for the 10-year Treasury yield before experiencing significant problems.
3. Inflation is also likely to continue rising. The unusual late-economic-cycle fiscal stimulus should increase the odds that inflation accelerates this year and next. It wouldn’t surprise us to see unemployment fall further to near 3 percent in 2019, which would put even more upward pressure on wages.
4. Economic acceleration is underway. The manufacturing, service and composite Purchasing Managers Indexes all increased more than expected in February, showing broad-based economic growth.2 In addition, the Conference Board’s Leading Economic Index for January jumped 1.0 percent, suggesting solid growth in the months ahead.3
5. Improving productivity measures could be the key to continuing an already-long expansion. Stronger productivity would likely mean higher real and nominal gross domestic product growth and improved standards of living. It would also likely make the next economic expansion more robust. It seems clear that the phrase “secular stagnation” that was tossed around as recently as 2016 is already in the history books.