After June’s solid payroll report, it’s more likely that the Fed will begin to taper its asset purchases sometime this fall. However, investors shouldn’t assume that this will derail the 2013 rally.
Why? As I write in my latest weekly commentary, there’s still little evidence that the US economy is taking off. Recent numbers, including June employment figures, suggest that the US economy will merely continue to slowly improve this year. This means that though yields may overshoot in the near term, they are likely to finish the year around current levels.
But while stocks can sometimes withstand moderate rate increases, as we saw last Friday when they rallied despite a sell-off in bonds, they may not withstand other scenarios.
Here are the three big market risks that I’m most worried about now:
1.) A prolonged and substantial move over 3% in the 10-year yield. While I expect rates to finish the year around current levels, there is the chance that yields will increase more severely then I expect. Higher rates would represent a risk to equities because they would hurt corporate margins, slow the housing recovery and make Treasuries more attractive to yield hungry investors.