Should equity investors be neutral on Treasury yields spike?

The 10-year Treasury yield temporarily crossed above 5% on Thursday following Fed Chair Jerome Powell's comments on inflation and higher for longer interest rates, putting a squeeze on traditional equity markets. Lisa Erickson, U.S. Bank Senior Vice President and Public Markets Group Head, emphasizes a neutral stance on equity investments as markets make sense of consumer resiliency and higher interest rate pressures.

"You've got this balance of puts and takes right now, and so we really feel for clients to be neutral to whatever is typically their long-term allocation to equities makes sense," she tells Yahoo Finance

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Video transcript

JULIE HYMAN: What are, then, the implications for people's trading strategy right now? Do-- are you recommending that clients get defensive in this environment, when it comes to their equity allocation?

LISA ERICKSON: We are right now at a neutral posture on the equity market. And while there are risks, like we have been talking about the fact that rates have been moving upward really for the most part, even though, again, some backed down today as well as continued tightness in monetary policy and economic growth generally slowing. On the other hand, we have still a very resilient consumer.

And you see that in Redbook sales. You see it in the retail sales number. We had it earlier in the week. And you certainly see it supported by the jobs market. And so, really, you've got this balance of puts and takes right now. And so, we really feel for clients to be neutral to whatever is typically their long-term allocation to equities makes sense.

JOSH LIPTON: And Lisa, in equities, as much you're neutral on the market, do you see opportunities in more maybe defensive sectors? Is it utilities or staples?

LISA ERICKSON: Well, certainly. As we look at year-to-date performance, one of the areas that really has lagged, even relative to some of the declines we've seen recently, is the defensive sectors. And some of those more income-oriented sectors like utilities, like consumer staples, and with the nice income and cash flow they can offer over time, and at now even more compelling valuations. We do think they may be of interest for clients, with time horizons further out than a half a year.

JULIE HYMAN: Further out in the half year, because I think some of these groups as well, when we talk about defensive sectors, as those that don't necessarily perform well when interest rates are high, right, when you talk about real estate or utilities. So is that why you have that longer time horizon caveat?

LISA ERICKSON: Absolutely, because in the near term, to the extent we've still got this upward rate momentum, they could continue to see some valuation compression. But again, for those who can look past that and hold for a little bit longer term time horizon to take advantage of eventually hopefully sentiment shifting as well as, again, those ongoing income streams from dividends, that should be helpful.