The U.S. Treasury Department is expected to issue $114 billion in bonds as markets cope with elevated bond yields and higher for longer interest rates. Kovitz Principal and Portfolio Manager John Buckingham explains his thoughts on how well the stock market should hold up against economic headwinds and the Fed’s rate policy as earnings season continues.

“Historically speaking… stocks have done well in higher interest rate environments, stocks have done well in inflationary environments. Well, heck, stocks have done well no matter what the backdrop is,” Buckingham tells Yahoo Finance. “Unfortunately, in the near term, obviously, there can be some volatility as we have certainly seen here of late.”

For more expert insight and the latest market action, click here to watch this full episode of Yahoo Finance Live.

Video Transcript

JULIE HYMAN: We were just talking about all of this issuance we were seeing in the bond market and the pressure that’s been putting on prices. How are you thinking about allocation and/or the impact on stocks from these higher bond yields?

JOHN BUCKINGHAM: Right. Well, I’m an equity guy, so naturally I’m going to still be very optimistic about the prospects for stocks. We have to keep in mind that while interest rates have risen dramatically, believe it or not, they’re still relatively low versus where they have been long term. Our investment newsletter, “The Prudent Speculator”, started in 1977. The average yield for the 10 year Treasury has been about 5.84% during that time.

So I get that yields are much higher and we’ve got to get used to that, but valuations on stocks, especially the average stock– we have to keep in mind that the overall market has not done well. In fact, it’s down significantly this year, the average stock, whereas, say, the S&P 500, you know, the Magnificent Seven if you want to call them that, the S&P 500, of course, is still higher.

So there’s lots of opportunities for longer term oriented investors to take advantage of some of the big sell-offs we’ve seen here in reaction to earnings, especially the Q3 results, that generally speaking, have been very good. But, of course, guidance is always the key, and many companies have not been as upbeat as they might have been in the past.

JOSH LIPTON: And, John, another, of course, big data point for investors this week will be that Fed policy meeting on Wednesday. I was just talking to Julie about that. The economists, the strategists, the investors we have on, John, they expect the Fed to stay on hold here, to pause. Is that your expectation, John, and just as importantly, when do you think you would expect them to start cutting?

JOHN BUCKINGHAM: Right. Well, I’m not an economist and I don’t play one on TV, but I will say that the consensus is that the Fed is done and that there will likely be rate cuts starting in 2024. The problem, if you will, for the Fed is that the economy has been so gosh darn strong, you know, with that GDP print last week, so the economy has held up far better than the Fed might have envisioned.

But, of course, you know, Fed– the rate hikes we’ve seen, that works with a lag, so ultimately we do think there will be a hit to the economy. We don’t think that we will have a severe recession. We’d be in the camp that if there is a recession, it’d be relatively mild. But, personally, my view is that many stocks have already discounted a severe recession. So if we do get a modest economic slowdown, I think that equities can make some headway as we head into the new year.

And the other point I’ll make is that, historically speaking anyway, stocks have done well in higher interest rate environments. You know, stocks have done wealth in inflationary environments. Well, heck, stocks have done well no matter what the backdrop is. Unfortunately, in the near term, obviously, there can be some volatility, as we’ve certainly seen here of late.