Surge in Growth Could Reignite Inflation

The favourite line of commentators that falling rates is bullish for stocks, isn’t always true.

There has been a serious loosening of financial conditions over the past six months as markets prepared for interest rates to peak and then start falling in 2024.

US and European production growth is responding to better financial conditions despite the fact the Fed hasn’t even started cutting rates yet.

The possible fly in the ointment is if growth takes off like a rocket and inflation becomes a problem again.

But with the S&P 500 rallying strongly into record territory, the short-term outlook remains bullish.

Keeping an eye on US 2-year and 10-year bond yields is important as we move forward, because a further jump in growth may see yields starting to rise again.

The Fed is probably fretting about the loosening of financial conditions and came out recently trying to jawbone the market down by saying rates were going to stay ‘higher for longer’.

The market is ignoring the Fed for now, as upside momentum has taken on a life of its own.

In today’s Closing Bell video I have a look at the US 2-year bond yield over the last few decades and compare it to the moves in the S&P 500.

As you’ll see in the video, the favourite line of commentators that falling rates is bullish for stocks, isn’t always true.

If something breaks due to a long period of elevated interest rates, stocks plunge and rates follow stocks lower.

Chinese stocks have seen serious selling pressure recently and the liquidation of Evergrande opens up the possibility of further contagion in the Chinese real estate sector. US commercial real estate remains under a cloud and if rates stay high for an extended period, there is increasing risk that something breaks in that sector.

So despite the rosy picture that makes the odds of higher prices in the short term a good bet, there are dangers lurking in the shadows that investors should be aware of.


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Murray Dawes,
Editor, Retirement Trader and Fat Tail Microcaps

Murray Dawes is our resident expert trader and portfolio managers. He is a former Sydney Futures Exchange floor trader who went on to design custom trading systems and strategies for ultra-wealthy clients (including one of Australia’s richest families). Today, his mission is to help ordinary Aussie investors make profitable investments, while expertly managing risk.

He uses his proprietary system for his more conversative and longer-term-focused service Retirement Trader…and then applies the same system to the ultra-speculative end of the Australian market in Fat Tail Microcaps (this service is strictly limited and via invitation only).

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