Chart of the Week: Rising rates might be fine for the stock market

This is the conclusion of today's morning summary, which you can register to receive in your inbox every morning along with:

One of the most disconcerting adages for stock market investors is that good news is bad news.

Lower job growth, slower wage growth, falling inflation and a weakening economy are often seen as positive for the stock market because they portend lower interest rates.

And as we all learned in 2022, the opposite can be painful for investors.

Right now, what people are really hoping for is a "soft landing," where a painless economic cooldown (a simple cloudy day after a sunny day, rather than a violent storm) allows the Fed to offer the S&P 500 its favorite cocktail of falling interest rates that encourage stock investors. (The SP closed at a record level on Friday.)

But what if the bad news isn't all bad? Lately, inflation has continued to moderate while other economic data has remained strong. And the stock market is trying to figure out where it's headed up.

In our chart of the week, we look at the 10-year Treasury yield, a benchmark indication of long-term interest rates.

Since December, the 10-year yield has risen 30 basis points and continues to rise whenever interesting consumer economic data comes out, like this week's retail sales report that featured a consumer like Jack Reacher.

It's worrying to some, as high yields often go hand in hand with high Fed rates and high inflation. But it is also positive, since rising rates reflect economic growth.

As Renaissance Macro's Neil Dutta wrote in a note this week, yields have risen on "activity days" (retail sales, employment data) and fallen on "inflation days" (CPI).

The interpretation proposed by Dutta is that “rates have risen because economic growth has been stronger, not because inflation has been stronger.”

One implication, “if one accepts that,” Dutta wrote, is that stocks should ultimately view good economic data as a positive.

If we learned anything about the 2023 market, it's that the modern US market has an impressive ability to shake off something bearish (high rates) when there's something shiny new bullish to get excited about (AI).

Optimism? FOMO? Who knows. But consumers are happythey are buyand inflation is moderating, although slower than some want. The end of hope for weak data may be near.