Can the stock market significantly advance with bond yields going higher? That’s what investors are trying to gauge. As governments around the world look increase their (already high) levels of borrowing and spending — it’s plausible bond yields are set to rise further. And it’s not hard to explain why… demand is falling as supply increases. But at what point does the stock market say enough?
Debt
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Bond Vigilantes To Have the Final Vote
Markets paused to take a breath this week following a six-week ~22% surge. The S&P 500 surrendered a routine ~2.80% – after touching a 12-week high of 5,968. With the market trading at 22x fwd earnings (a premium in any environment) – investors are arguably more mindful of (a) ongoing tariff risks- with new threats from Trump on Europe and Apple; and (b) the thread of rising bond yields – and any potentially widening of the deficit.
The Key to Growth: Business Investment
With 10-year yields trading around 4.50% (with the possibility to go higher) – why haven’t equities sharply corrected? It’s a good question. For e.g., on the surface, one might think equities would struggle given the zero risk premium investors are receiving. But that has not been the case. The stock market has withstood the sharp rise in bond yields (for now anyway). However, I believe there is a simple explanation. It’s the amount of liquidity in the system. Liquidity is abundant – evidenced by the very low credit spreads in the market (participants see very little risk). Generally credit spreads widening are your first sign of trouble.