Will Rising Bond Yields Be Bad For Stocks?
Rising bond yields historically haven't been bad for stocks. While you may see stories in the financial press saying otherwise, the facts show that periods marked by rising bond yields have often coincided with bull markets in stocks.
The key to stock prices and yields rising at the same time is the shape of the yield curve. That is the difference between long-term term bond yields and short-term interest rates. A negative yield curve is what has toppled stocks. When short term rates are higher than long-term yields, that is what hurts economic growth. The red circles show how the negative curve preceded the last three recessions. Currently, the yield curve is not near inversion, which is means the economic expansion eight-and-one-half year expansion could continue and the bull market in stocks could continue.
Economic growth is manifested in profits of publicly-held companies and largely determines how stocks are valued.
If all this good economic news was not enough, the leading indicators for the U.S., a forward looking composite of 10 economic indexes, were released on Thursday, and they strengthened by 1% in January to 108.1, following a 0.6% increase in December, and a 0.4% increase in November. The LEI is higher than it has been since 1999."The U.S. LEI accelerated further in January and continues to point to robust economic growth in the first half of 2018," according The Conference Board, an association for the nation's largest corporations not prone to hyperbole. "The leading indicators reflect an economy with widespread strengths coming from financial conditions, manufacturing, residential construction, and labor markets." This chart shows how the LEI has definitively rolled over well in advance of the last two recessions. Nothing like that is happening now. The Standard & Poor's 500 closed Friday at 2747.30, which was a 1.6% surge for the day and 0.6% higher than a week earlier.
This article was written by a veteran financial journalist based on data compiled and analyzed by independent economist, Fritz Meyer. While these are sources we believe to be reliable, the information is not intended to be used as financial advice without consulting a professional about your personal situation.
Indices are unmanaged and not available for direct investment. Investments with higher return potential carry greater risk for loss. Past performance is not an indicator of your future results.
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