What Is Driving Rising Yields?

Jeremy Siegel

October 2, 2023

Jeremy J. Siegel, WisdomTree’s Senior Investment Strategy Advisor, is the Russell E. Palmer Professor Emeritus of Finance at The Wharton School of the University of Pennsylvania. Professor Siegel has written and lectured extensively about the economy and financial markets and is a regular contributor to the financial news media. In 1994, he received the highest teaching rating in a ranking of business school professors conducted by BusinessWeek magazine. His book, Stocks for the Long Run, was named by The Washington Post as one of the 10 best investment books of all time. His latest book, The Future for Investors, is a bestseller.

While a number of headlines captivate media focus from the autoworkers strikes and the debate over the government shutdown, the equity markets have been dominated by rising yields in the bond market over the last 4-6 weeks.

The incessant pressure for higher yields comes from two factors: oil prices, but most importantly, the strength of the economy. The trade report (net imports and exports) came in very strong last week and that has ratcheted up revisions to third quarter GDP estimates. We likely will not reach the 5% GDP growth figures the Atlanta Fed GDP Nowcast suggests, but 3.5% or above is quite a strong showing.

Jobless claims again came in very low, just above 200,000 jobs, indicating no slowing in the labor market. There was a strong durable goods data report last week; a little bit of a revision downward from the previous month, but still the momentum is upward.

Although there is no evidence of a slowdown in the economy yet, we have higher interest rates and mortgage rates may soon exceed 7.5%. Some are facing mortgage rates above 8%. Yet, despite these higher rates, the Case-Shiller Home Index released on Tuesday again showed another increase in home prices for August. This data is a little lagged, so perhaps the housing prices may cool a bit in October and November if rates stay elevated.  

We also received fresh money supply data last week which showed a decrease, the first time since April. The net increase from the April low is paltry. And let’s remember that money supply is a key metric for gauging inflation. I’ve examined the excess amount of money created through Fed policy from a long-term trend. Since COVID, we’ve had 12% in above-trend growth in the money supply. Note, this is not the absolute increase (which is up 30%), but the amount created in excess of the 5% trend growth rate that prevailed in the previous decades. The 5% M2 growth level is an important benchmark to keep in mind and the money growth rate we want to see in a normal functioning economy with 2-3% real growth and 2-3% inflation.

Inflation since pre-COVID has also now been about 12% above the long-term trend in inflation of 2% to 2.5%. This is a quite interesting development and says to me that inflation has finally caught up to money growth.

Some praise the Fed for bringing about “the immaculate disinflation:” a cooling of inflation without causing excessive unemployment or a recession. I wrote in Barron’s last Friday that we should not give the Fed credit for fixing a problem they created. It is comparable to the Fed recklessly driving on the streets, hitting a pedestrian and then rushing him to the hospital so he did not die. But there are still massive injuries; the American public suffered through the worst inflation in 40 years—something that did not have to occur had the Fed curtailed its money growth much earlier.

The market is pivoting all around yields but if we look at the long-term, I see the S&P 500 selling at about 17.5 next year’s earnings. Yes, there might be a recession next year and those earnings estimates might be too optimistic. But 17.5 is a very good long-term ratio with a 5.7% earnings yield. Stocks still represent an excellent investment at these levels. Of course, TIPS yields have also risen, and investors can get 2.2% real on 10-year TIPS but there is still a 3.5% advantage for stocks.

Past performance is not indicative of future results. You cannot invest in an index.

Professor Jeremy Siegel is a Senior Investment Strategy Advisor to WisdomTree Investments, Inc. and WisdomTree Asset Management, Inc. This material contains the current research and opinions of Professor Siegel, which are subject to change, and should not be considered or interpreted as a recommendation to participate in any particular trading strategy, or deemed to be an offer or sale of any investment product and it should not be relied on as such. The user of this information assumes the entire risk of any use made of the information provided herein. Unless expressly stated otherwise the opinions, interpretations or findings expressed herein do not necessarily represent the views of WisdomTree or any of its affiliates.

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