Rising rates pose headwind for stocks

Investors wondering how stocks will fare when the Federal Reserve starts hiking interest rates need only look at Friday's stock market action on Wall Street. The math is simple: Spiking bond yields add up to falling stock prices.

The S&P 500 fell 0.6% to 1985.54; down 1.1% for the week, snapping its weekly winning streak at five. The index is at its lowest level since Aug. 19.

The sell-off was due in part to a massive drop in the U.S. government bond market. Investors dumped bonds after a strong August retail sales report and the highest consumer confidence reading in 14 months raised fears of higher rates down the road.

The combination of strong economic data and fears that the Fed could push forward its timetable for interest-rate cuts to earlier next year spooked investors. The yield on the 10-year Treasury note jumped above 2.6% for the first time since early July. Its high for the day was 2.614%, just shy of the 2.617% yield on July 7. The yield on the benchmark 10-year was as low as 2.32% on Aug. 28.

"The stock market traded off on the retail report and long-term Treasury bond yields continue to climb," says Scott Anderson, chief economist at Bank of the West. "Traders see this report as raising the odds of a change in Fed language at the September meeting (this coming week) that may presage an earlier rate hike from the Fed next year."

Stock investors worry that rising rates will slow the economy and hurt corporate profits.