Stocks Love A Negative Real 10-Year Treasury Yield
The following chart illustrates an excellent heuristic and simple (if not too simplistic) illustration of longer-term stock market valuation moves. Note how the stock market’s capitalization has significantly outpaced nominal GDP — never sustainable — since the nadir of the Great Financial Crisis (GFC). In contrast, the ex-post real 10-year Treasury yield has fallen from 4.76 percent at the end of Q1 2009 to -6.24 percent at the end of Q1 2022.
Simple Upshot?
Stocks love ex-post negative 10-year nominal yields, where the inflation expectation component misses realized inflation in a big way. This model suggests if you’re betting on a new stock bull market beginning sometime soon, you’re also betting on the recent move in real yields to the upside to reverse and turn more negative. That is a bet on several issues, including how distorted the bond markets are, the credibility of the Fed, the Treasury holdings of foreign central banks, and the path of inflation, among others.
Source: https://global-macro-monitor.com/2022/12/14/stocks-love-a-negative-real-10-year-treasury-yield/
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