GOOD NEWS IS GOOD NEWS $TNX $SPX $SPY
From Alhambra Investments (Calhoun): "There is an old saying on Wall Street that the market is not the economy and the economy is not the market. Indeed, that is true for the very short term but over the longer term, stocks do track the economy – and corporate earnings which are obviously related. Rising interest rates are generally a positive indicator of future nominal growth – and therefore, earnings – so we ought to expect stocks to rise right along with rates. And history confirms that. Long-term interest rates have risen in exactly half the 96 years since 1928 (that’s how far back my data goes on rates) but stocks have risen in 77% of those years vs 75% in all years over the same time period. Not surprisingly, stocks like it when the economy is good. Interest rates, obviously, have an impact on stock valuations but the dominant factor is earnings, not interest rates.

Another indicator to consider is the yield curve. As I discussed last week, the recent steepening of the yield curve is what is known as a bear steepener where long-term rates rise faster than short term rates. That type of steepening is not associated with recession or economic slowing. A steepening yield curve is associated with higher future growth and the steeper the curve, the better the future growth. The Cleveland Fed uses past yield curve data to predict future GDP growth one year out. In December, when the 10-year/3-month curve was still inverted (but steepening), the expected GDP growth one year out was 2.1% and the odds of recession were just 30% (down from 68% in May of last year). With the curve now in positive territory (+45 basis points), predicted future growth is higher and recession odds are lower. Maybe I’m missing something but what this looks like to me is the soft landing so many thought impossible.

Selling stocks because growth is better than expected and interest rates have risen modestly is very short sighted. I’m reminded of an acronym from my Navy days – KISS. Keep It Simple Stupid. Good news on the economy is good news for stocks."