Real Yields Show Where the Stock Market Is Really Headed

Text size

No one knows if even an accelerated pace of rate increases is enough to eliminate inflation—or what it will do to stocks.

Spencer Platt/Getty Images

The stock market’s greatest fear is coming true—but the major indexes barely budged. Don’t expect the calm to last.


Dow Jones Industrial Average
ticked down 0.1% this past week, while the

S&P 500
ticked up 0.1%. The

Nasdaq Composite
rose 0.7%.

Those results are impressive given the unrelenting stream of data that suggests the U.S. has a major inflation problem. Wages rose 5.6% year over year in March, up from 5.2% in February. The core personal consumption expenditures index, the Federal Reserve’s preferred inflation metric, rose 5.4% in February, well above the central bank’s 2% target. And March’s ISM Manufacturing PMI fell to its lowest level since September 2020, as a deceleration in new orders and higher prices weighed on sentiment.

Financial markets responded by pricing in ever-larger rate increases. There’s now a 100% chance of a rate hike at the May Federal Open Market Committee meeting, and a 71% chance of a half-point increase. Even scarier, there’s a greater than 70% chance that rates will end the year between 2.5% and 2.7%, suggesting that the Fed is going to have to move really, really fast.

The problem is that no one knows if even that accelerated pace is enough to eliminate inflation—or what it will do to stocks. “The market, like the Fed, has no idea how much tightening is necessary to stop a wage-inflation spiral,” writes Nordea strategist Sebastien Galy. “The question is whether this will…


Read More

Recommended For You

Leave a Reply

Your email address will not be published. Required fields are marked *