Stock Market Looks Poised to Rally as Bond Yield Falls

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The worst may be over for the stock market.

Key equity indexes continued their autumn rally, and there could be more gains before the end of the year, helped by continued strength in the Treasury bond market.

The

S&P 500
index gained 1.5% this past week to 4026, while the

Dow Jones Industrial Average
was up 1.8%, to 34,347. The S&P 500 is down 15.5% so far this year, while the Dow is off just 5.5%. The technology-heavy

Nasdaq Composite
is still off 28%.

The Dow industrials, often maligned because they include many old-line companies, could be back in the black by year end. The index’s gains have been helped by a quirky, old-fashioned price weighting that gives added weight to high-price stocks. Dow components

Chevron

(ticker: CVX),

Amgen

(AMGN),

Travelers

(TRV), and

Merck

(MRK), all priced over $100, have advanced nicely this year, boosting the index.

“We’re at the same level as May on the S&P 500, despite all the bad news,” says Jim Paulsen, chief investment strategist at the Leuthold Group. “There have been multiple rate hikes, bad inflation reports, tech earnings disappointments, and higher long-bond yields.”

Paulsen doesn’t buy the “lost decade” talk that stocks will do poorly in the 2020s. He’s encouraged that the Treasury bond market is ignoring hawkish comments from some Federal Reserve policy makers. The yield on the 10-year Treasury fell to 3.68% last week, continuing a decline of more than a half-percentage point since its October peak. Look for mortgage rates to fall toward 6% in the coming weeks from recent levels around 6.6%.

“The 10-year Treasury is ignoring the Fed, which isn’t uncommon at the end of tightening cycles,” Paulsen says. “There’s an idea that the stock market takes off when the Fed stops raising rates, but it actually moves when the bond market stops raising rates.”

Read More Up and Down Wall Street

He sees the S&P 500 topping its old high of nearly 4800 set in early January and reaching 5000 in the next year, a gain of almost 25%. The index now trades for a reasonable 17 times 2023 estimated earnings.

Paulsen says that stocks generally move ahead of earnings at the beginning of bull runs. And he’s encouraged by several factors, including lower inflation and rising confidence among consumers and small businesses. The bond market sees inflation of just 2.5% annually over the next five years, down from recent readings of about 8%. If bonds are right, stocks could head much higher.

Write to Andrew Bary at [email protected]