Are Bonds a Threat to Stocks?
So far stock prices have advanced during the back-up in long-term yields from early July. This is indeed the historical norm, with stocks having fallen in only three of 21 post-war yield back-ups. The S&P 500’s total return has been higher during yield back-ups, versus the historical average. Rising yields imply higher inflation, faster growth and less systemic risk – all of which raise expected earnings and protect the present high equity risk premium. But in that better environment, investors need not demand such a high risk premium as the price of risk-bearing. So the ERP can be expected to fall, and stock prices need not decline to maintain it. The biggest immediate risk is that some “risk parity” player, or someone else habituated to the “new normal” of low yields, blows up and creates a systemic threat.