For the past 20 years, higher bond yields have been generally better for stocks. So why is the market suddenly spooked by rising yields? This question is posed by an article in The Wall Street Journal, and the short answer is that this could be the wrong sort of rise.
This time, the rise could be attributed to banks turning hawkish, worried about inflation. In the long term, it could make portfolios more volatile, since bonds wouldn’t provide a cushion when stock prices drop. In the short term, if this sharp rise is the beginning of a trend, then shares might be in trouble, the article continues.
Looking back to the spring, when yields were climbing higher, the outlook for inflation is now about the same but the outlook now for economic growth is worse. Now, stocks are reacting the way they do when yields rise, due to that hawkish shift in central banks. On the bright side, higher capital spending and the current boom in the adoption of technology could boost productivity, dampening inflation and accelerating growth. The down side could be the dreaded “stagflation” situation, where households are hit with higher prices from supply stoppages and energy costs while inflation remains high.
With all the uncertainty about economic outcomes, it would be wrong to assume that this trading pattern will continue. If bond yields keep going up, S&P 500 investors need to be sure that it’s for the good reason of a growth economy and not the bad reason of inflation making banks nervous, the article concludes.