Stocks Rally After Weak Bond Yields and Negative Earnings

Stock Market Investors: Get Ready to Buy Stocks! Buy Treasuries to Protect Yourself

Wall Street turned risky on Tuesday after a sharp increase in bond yields and disappointing earnings reports on both sides of the Atlantic.

Reversing a sharp sell-off, stocks rallied after the leading banks of Europe reported better-than-expected results and the benchmark S&P 500 rose more than 2 percent on improving economic data.

Thursday’s gains overshadowed a controversial move by the Trump administration to impose tariffs on $50 billion of Chinese goods on Monday.

As President Trump presses ahead with tougher policies toward the developing world, the U.S. Treasury held out the prospect of more tariffs on Friday to respond to a vow to retaliate by China.

While investors had most recently worried about a trade war between the world’s two largest economies, a surprise cut in the European Central Bank’s bond-buying program that started on Thursday should lessen anxiety, analysts said.

Another sign of global optimism was a Wednesday move by the British prime minister’s office to allow a delegation from the European Union to lay out demands for withdrawal from the bloc.

Most of the earlier risk-off trade in Asia was also reflected in the decline in the yen, which usually moves inversely to the S&P 500 and keeps benchmark Japanese government bonds from over-extending upward.

For American investors, which have spent much of this year fretting about rising interest rates and the risk of a “correction,” Thursday’s rebound helped quell their concerns about a second-half slowdown that, so far, has not materialized.

Wall Street seems to be assuming that the rhetoric of the past two weeks surrounding trade wars and threats of retaliatory tariffs has at least calmed a little, if not completely quieted down.

For investors who are already long equities, the stock market has become a more attractive place to park money. Already in the sixth-longest bull market on record, stocks are becoming significantly more profitable than bonds.

The S&P 500’s 20-year earnings yield, which shows how much earnings flow back into the market as an investor receives an equity dividend, has pushed up sharply in recent months. This can be seen in the chart below, which shows the gross amount by which the S&P 500 is trading above the 20-year average.

Leave a Comment