Are we out of the woods yet? After the fastest correction from a record high in the history of the S&P 500 Index, stocks staged an impressive comeback last week. The S&P 500 put together its best week since 2013, rallying more than 5% off the lows to bring its session win streak to six. This week we consider what this means moving forward, including what higher interest rates and rising inflation might mean for stocks.

Strong Fundamentals

Whether we are out of the woods yet is a tough question to answer with any confidence, but when we weigh the evidence, it appears the odds are good that the worst is behind us.

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Inflation data stole the headlines, but reports on retail sales, manufacturing, and consumer sentiment were also released last week (February 12 – 16). Market participants may have been on edge about inflation, following faster than expected wage growth in the January jobs report that had pushed market interest rates higher and led to a brief, though volatile, correction in stocks during the previous week. However, even though both consumer and producer inflation came in above expectations, and interest rates moved higher, stocks saw gains every day last week. The S&P 500 closed the week 4.4% higher as investors renewed their focus

As 2017 ended, fixed income investors were searching for income, after several years of 10-year Treasuries yielding less than 2.5%. When 2018 began, this changed quickly as tax reform and signs of inflationary pressures pushed market interest rates higher. The 10-year Treasury yield rose 0.87%, from a starting yield of 2.04% on September 7, 2017 to 2.91% on February 15, 2018. Investors have grown concerned that improving economic data and rising inflationary pressures may cause the Federal Reserve (Fed) to raise interest rates in 2018 at a more aggressive pace than originally anticipated. Given this backdrop, investors are naturally reassessi

Tax reform progress and ultimate passage during the fourth quarter dominated headlines, sending short-term yields much higher amid increasing expectations for future Federal Reserve (Fed) rate hikes. With longer-term Treasury yields more muted, the Treasury yield curve flattened again over the quarter, and made for a positive month for all major fixed income sectors [Figure 1].

Much like the first three quarters of the year, economically sensitive domestic sectors of the bond market were aided by investors’ ongoing search for income in a low-yield, low-return environment and by steady economic data, which cont