James Reilly of Capital Economics expects U.S. real, or inflation-adjusted, yields to resume their rise shortly and possibly end the outperformance of stocks.
As investor sentiment shifts by the day, the U.S. stock market’s rally in recent weeks may be at risk again as rising real yields threaten to undercut the market’s performance relative to the rest of the world. That’s the view of James Reilly, an assistant economist at Capital Economics. In a note released Thursday, he said Capital Economics expects “equities in general to fall over the rest of 2022” and suspects that “stocks in the U.S.
Real, or inflation-adjusted, yields matter because they’re seen as the true cost of capital for corporations after factoring in inflation. When they go up, real yields are bad for investors in stocks and other risky assets as they make it more expensive for, say, technology companies to undertake development, as one example. And Reilly says real yields are likely to keep rising in line with the expected trajectory of the Fed’s main policy interest rate which currently sits between 2.25% and 2.
Since mid-June, U.S. equities have generally been rising on the view that an impending domestic recession would likely curtail the Fed’s aggressive rate-hike campaign, and help bring inflation down.
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