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Chart of the Week: Rising rates might be fine for the stock market

In Business
January 21, 2024

This is The Takeaway from today’s Morning Brief, which you can sign up to receive in your inbox every morning along with:

One of the more puzzling adages for stock market investors is that good news is bad news.

Less job growth, slower wage gains, falling inflation, and a softening economy are often viewed as positives for the stock market because these things portend lower interest rates.

And as we all learned in 2022, the opposite can be painful for investors.

Right now, what folks are really hoping for is a “soft landing,” where an economic cooldown isn’t painful — a mere cloudy day after a sunny day, rather than a violent storm — which allows the Fed to offer the S&P 500 its preferred cocktail of falling interest rates that make stock investors cheer. (The S&P closed at a record high on Friday.)

But what if the bad news isn’t all bad? Of late, inflation has continued to moderate while other economic data has remained strong. And the stock market is trying to figure out which way points up.

In our chart of the week, we look at the 10-year Treasury yield, a go-to indication of long-term interest rates.

Since December, the 10-year yield has jumped 30 basis points and keeps jumping whenever hot economic data about consumption comes out — like this week’s retail sales report that showed a Jack Reacher-like consumer.

It’s worrisome to some, as high yields often go hand-in-hand with high Fed rates and high inflation. But also positive, as rising rates reflect economic growth.

As Renaissance Macro’s Neil Dutta wrote in a note this week, yields have risen on “activity days” (retail sales, jobs data) and fallen on “inflation days” (CPI).

The interpretation Dutta puts forth is that “rates have gone up because economic growth has been firmer, not because inflation has been stronger.”

One implication, “if you accept that,” Dutta wrote, is that stocks should finally see warm economic data as a positive thing.

If we learned anything about the 2023 market, it’s that the modern US market has an impressive ability to shake off a bearish thing (high rates) when there’s a shiny new bullish thing to get excited about (AI).

Optimism? FOMO? Who knows. But the consumers are happy, they’re buying, and inflation is moderating, albeit slower than some want. The end of hoping for weak data may be nigh.

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