What's Behind Those Shaky Stocks?
Moreover, stock investors use bond yields to gauge whether stocks are reasonably priced, notes Jack Ablin, chief investment officer for Harris Private Bank. And with bond yields rising, stocks don't appear as cheap as they were a few months ago. Still, many market strategists would argue that U.S. stocks are one of the few undervalued—or, at the very least, fairly valued—asset classes in the global financial markets.
Finally, rising bond yields indicate that borrowing costs will soon rise—and that could slow the torrent of buyout activity that has been taking place on Wall Street by private-equity firms and leveraged-buyout specialists.
Still, keep in mind that bond yields are still low by historic standards. So unless they spike by a full percentage point or more in the next few weeks, the economy should be able to handle rising rates.
Of course, there's also bond investors' core concern: that the strong economy will eventually produce higher inflation. But most measures of core inflation—excluding volatile food and energy prices—show that the rate of inflation is falling, not rising. And that's got to be good news for stocks.
"Think about it," Paulsen says. "The markets are waking up to the realization that the economy is proving better and more sustainable than expected." So long as inflation doesn't rear its ugly head—and there few signs that it will anytime soon—"how can that be bad for stocks?" Paulsen asks.
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