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Last year, as Treasury yields climbed, stocks mostly ignored the trend. The strategists’ view: Yields are rising due to expected economic growth, so it’s all copacetic. And with anticipation of an upcoming Fed rate cut, there was yet another reason to remain calm.
Investors are no longer cold-blooded when it comes to the 10-year yield (^TNX). It is progressing towards 4.7%, approaching the peaks of the end of 2023.
One reason is that this time the rise is accompanied by data showing that inflation is accelerating again, including this week’s report from the Institute for Supply Management, which indicates that prices paid for services are increasing.
Markets have already lowered their expectations for further Fed rate cuts this year. They may need to adjust those forecasts even further, especially since new President Trump’s fiscal policies are widely seen as potentially inflationary — a sentiment that figures prominently in the minutes of the Fed’s December meeting.
“My main fear is that the inflation genie was never quite put back in the bottle after the Covid inflation spike,” Jurrien Timmer, head of global macro at Fidelity Investments, said in a statement. interview with Yahoo Finance. “If the economy actually accelerates without the inflation dragon being completely vanquished, we could see inflation, which is currently in the high twos range, return to three and perhaps three and a half or four . This is not a prediction, but it is a scenario that I think would prevent the Fed from cutting rates further.”
According to Timmer, this is not a scenario that the market is currently pricing in.
There is debate over the level of the 10-year yield that would be particularly problematic for stocks, with the consensus moving closer to around 5%. And the markets have already had a taste of it: the 20-year Treasury rate, less closely watched, reached 5% this week.
Despite the returns, most Wall Street strategists (including Timmer) still expect upside for stocks this year.
Michael Arone, State Street Global Advisors’ chief investment strategist for the U.S. SPDR business, said earnings — not fiscal policy, not the Fed, not Trump — will determine the direction stocks take this year. year.
“From my perspective, I think investors are wrongly obsessed with how many Fed rate cuts we’re going to get this year,” Arone said in an interview. “Profits are increasing and I think that’s where the focus should be.”
