Inflation, Bonds & Stocks

Check out the accompanying pdf and chart collection. Executive Summary: Since 2008, the Fed’s quantitative easing had kept a lid on bond yields. But with the Fed now tightening—releasing bond yields to move solely by market forces—will yields be pushed above the inflation rate (where they usually reside)? A reversal from negative to positive real bond yields could trigger a credit crisis and recession; but we put the odds of that scenario at only 30%. Rather, we expect a soft landing for the economy, inflation moderating soon, and the Treasury bond yield marking time between 3.00%-3.25%. … For the stock market, high inflation boosts earnings yet depresses the valuations investors are willing to pay for those earnings. The lower valuations reflect investors’ fears that this will all end badly.