Stocks are near record highs and economic growth is solid. On paper, things are good.
But economists have several worries. Rising interest rates could derail a bull-market in stocks that just entered its fifth year. The artificial-intelligence boom could falter, eliminating the main driver of that remarkable rally. And some Americans are spending down their savings, a worrisome sign of financial stress at many households.
Three charts tell the story.
1. Rising rates. The biggest news in financial markets this year is soaring interest rates, which are heading back toward historic norms after nearly 20 years of unusually cheap money.
Several factors are pushing rates higher. The Iran war energy crisis has caused inflation that will be a problem until the Islamic theocracy stops disrupting Persian Gulf energy supplies. Governments and businesses are issuing huge amounts of debt, forcing them to offer higher rates to entice buyers. Relatively strong growth can also push rates up, especially in concert with those other factors.
Rising rates haven’t yet caused widespread problems, even as the press worries that bonds will “blow up.” It doesn’t quite work like that. Higher interest rates provide a higher return for investors, who now have a stronger incentive to buy bonds. Stronger demand could bring rates down slightly. Economist Ed Yardeni of Yardeni Research says the benchmark 10-year Treasury yield—which has jumped from 4% to as high as 5.3% since the Iran war started in February—is “back to normal” and will settle between 4% and 5%. That would be a drop from current levels, which means rates on mortgages and other loans would decline as well.
2. Extreme stock-market concentration. Higher rates can ding stocks, because investors buying bonds to cash in on rising returns might sell stocks to do so. The stock market has held up, however, with the S&P 500 hitting a new record high on October 6. It’s just a hair below that now.
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Analysts see another problem, however. The S&P 500 is up a healthy 14% this year, but that is driven almost entirely by the AI boom, with an assist by the energy sector, benefiting from the Iran war and higher prices. The rest of the market is meh.