It was a chaotic week for stocks, one that saw them verging on a meltdown as bond yields shot higher. Instead, the Dow Jones Industrial Average dropped just 0.3%, while the S&P 500 index rose 0.5% and the Nasdaq Composite gained 1.6%. Even the Cboe Volatility index, or VIX, finished the week relatively flat at 17.3, after trading at 20.88 on Wednesday, its highest level since May.
And it has been the primary driver. Despite the S&P 500’s 7% decline from its July peak, the “equity risk premium”—the index’s earnings yield minus the yield on the 10-year Treasury—sits at 0.8 percentage point, right about where it was before the selloff. That’s a sign that the recent selloff was little more than the market’s response to the suddenly higher yield that investors can get from Treasuries, rather than more fundamental issues like, say, earnings power.
That robustness may not emerge. The economy tends to get a delayed hit when rates rise, and once it falters, profits may disappoint, says Victor Cossel, macro strategist at Seaport Research Partners.
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