In a world of record-low interest rates and sluggish growth, it should be no surprise that inflation has been all but absent since the end of the Great Recession. Tighter monetary policy, wage growth and potential fiscal stimulus, along with an expected jolt to cyclical economic expansion, have many forecasting higher inflation and interest rates on the horizon.
So what does that mean for stocks?
There is little doubt that low interest rates have been a boon for stocks over the past decade. Post financial crisis, the 10-year Treasury yield dipped below the dividend yield on the S&P 500. This seldom seen scenario presented investors with the oft-mentioned trade-off of owning a guaranteed low fixed rate of return or the same stated yield with the potential of earnings and valuation expansion in stock prices. The “equity risk premium” had seldom been so attractive relative to bonds.
Bond bulls might point to the head fakes we have seen over the past five years in which rates moved higher only to reverse course and make new lows. With the Fed already having hiked short-term rates to 0.75-1%, it would…