The pro-labour theory of markets has played out in all ways but one in my view. First growth would be good, and unemployment would be low. Correct. Second, cost of capital would rise. Correct. Third, equity markets would suffer from higher cost of capital. Not so true. I am going to focus on this third part.
Ever since Covid, when the Federal Reserve stepped in as a buyer of corporate credit, credit spreads have become tighter and tighter. This is bullish for equities, and as of today, these spreads are at very tight levels.
Binding corporate and sovereign credit together is pretty common in emerging markets. While it is great for corporates, it tends to not be so good for sovereign yields. So the question is when do rising sovereign yields begin to affect equity markets?
