The top 500 US stocks ranked by market capitalization have partially recovered one of the deepest pullback seen during the current bull market. Rising risk-free rates (US treasuries) at a time when inflation has declined, has resulted in higher US real yields (nominal treasury yields less inflation). Rising risk-free yields attract risk averse investors chasing higher risk-adjusted yields during enhanced uncertainty.
Fed Chairman Jerome Powell downplayed a rate hike this month but left the door open to one before the end of the year, as the rate setting committee awaits incoming data to guide future policy decisions. The S&P 500 recovery over the last two weeks coincides with the tapering off of Treasury Inflation Protected Securities (TIPS) and another forward looking measure of real yields shown below. The move lower in yields has been driven primarily by weaker than expected US growth and jobs data. Both categories have been targeted by the Fed and remain crucial to seeing inflation reach the 2% target.
