That Quarter, Those Yields, This Correction

US stocks are in a 10%-plus correction. We’d expected a sharp correction, but we’d also expected a run to new highs first, which hasn’t happened. We expected the Fed to recognize that inflation, properly measured, has already more than achieved its target; instead, it has doubled down on a “higher for longer” strategy. A boom in Q3-2023 only makes it worse, because the Fed wrongly believes that growth causes inflation, and has said it is on the alert for upside growth surprises. But that means this correction has taken “peak hawk” on board already, and has probably run its course. High long-term yields are a fear factor for systemic risk, since even lower ones were enough to take out Silicon Valley Bank. While they represent risky “regime change” as the economy matures out of the post-GFC era of “secular stagnation,” it is a good thing to move to a higher growth epoch. We don’t expect a surge to new highs in yields, because we don’t see how the economy could accelerate from what is already a boom in Q3. Research tentatively shows that high yields do influence subsequent output growth – but surprisingly, they help it. We are mindful of black swan risks in the current Israel situation, but so far risk-sensitive markets like oil and gold are showing nothing to worry about.