Bond Vigilantes Awaken Counterparts In The Stock Market | 2/9/2018 | Staff
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NEW YORK (Reuters) – Bond vigilantes could be finding allies in the stock market.

With inflation fears back in vogue and the U.S. budget deficit seen ballooning, vigilantes have stormed fixed income trading floors and seem to be cropping up in equity markets too, where they may punish already battered stocks for policymakers’ and lawmakers’ actions.

Stock - Market - Bond - Market - Pain

“The stock market is feeling the bond market’s pain. Absolutely, no doubt – we have stock vigilantes too,” Ed Yardeni, the longtime Wall Street strategist now president at his namesake research firm, told Reuters.

The term “bond vigilante” was coined by Yardeni in 1983 to describe investors’ insistence on high yields to compensate for the risk of inflation and budget deficits during the Reagan administration. A stock version of a vigilante would seek to influence lawmakers and policymakers by slamming equity prices.

Bond - Yields - Feb - US - Government

Bond yields began to soar on Feb. 2 after U.S. government data showed the biggest wage gains since 2009, convincing investors of the growing threat of inflation, long tame since the 2007-2009 recession.

Stock vigilantes could make their own demands of policymakers.

Vigilante - Logic - Rates - Pressures - Economy

Under vigilante logic, if rates are higher, if inflationary pressures are running hot, if the economy is nearing its long-run potential and the Federal Reserve really is going to raise rates quickly in response, then the value of stocks needs to be lower too. Potentially a lot lower.

“Over the last half a dozen of years we have been saying equity valuations can be higher because we are living in a low interest rate and low inflation environment, but that’s reversing a little bit and that’s what we are staring at now,” said Art Hogan, chief market strategies at Wunderlich Securities.

Stocks - Days - S - P - Percent

Stocks have been falling apart in recent days, with the S&P 500 down 11 percent from a high hit just two weeks ago. But the switchback comes...
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