The combination of elevated interest rates, rising bond yields, and geopolitical strife is creating a risky environment for stocks. The autumnal equity slump could deepen.

Gold, the classic hedge during crises, has been spiking higher. Crude oil prices also are rising and seem set on course for $100 per barrel, as traders worry about supply disruptions caused by the expanding Israel/Hamas war.

The rise in oil prices is good news for energy investors, but bad news for inflation fighters. Renewed inflationary pressures are pushing bond yields higher.

The CBOE Volatility Index (VIX), the so-called “fear index,” has surged to surpass 19. A reading of 20 or higher signals a period of greater volatility and anxiety.

Beware the bond market…

It pays to keep a particularly close eye on the bond market, which represents a “collective wisdom” about the future direction of not just bonds but also stocks.

Bill Clinton’s chief political strategist James Carville once said:

“I used to think that if there was reincarnation, I wanted to come back as the President or the Pope or as a . 400 baseball hitter. But now I would want to come back as the bond market. You can intimidate everybody.”

Most retail investors obsess over the major stock indices. But right now, Wall Street is fixated on another equally important benchmark: the yield on the 10-year U.S. Treasury note.

This yield is used to help set the price of money for everything from mortgage rates to corporate borrowing. That makes its movement (the yield rises as Treasury prices fall) hugely consequential for the broader market.

Higher bond yields raise borrowing costs, hurting economic growth and corporate profitability. Higher yields also make bonds a more attractive alternative to riskier stocks.

The red hot U.S. retail sales report for September, released Tuesday, reignited inflation and interest rate fears, sending the 10-year Treasury yield higher as investors worried that the Federal Reserve might surprise the markets with a rate hike at its policy meeting next week.

As you can see from the following chart, the yield hovers above its 50- and 200-day moving averages, which indicates upward momentum:

On Wednesday, bad omens about war and inflation pushed the 10-year yield past 4.9%. That’s the highest level since 2007, the year when the world was on the cusp of the great financial meltdown. It’s also far above the yield’s multiyear resistance level of 4.5%.

If the yield rises to 5.0% or above, stocks will come under intense pressure. If an investor can earn a 5.0% yield in a safe government bond, there’s considerably less incentive to put money into riskier assets like stocks.

Higher yields and renewed inflationary pressures are turning investor moods bearish. On Wednesday, the main U.S. stock market indices closed sharply lower, as follows:

• DJIA: -0.98%
• S&P 500: -1.34%
• NASDAQ: -1.62%
• Russell 2000: -2.11%

Gold and crude oil prices, as well as the VIX, all continued their ascent Wednesday.

Also souring investor moods has been the continuing clown show in the leaderless U.S. House. Wall Street is typically impervious to political machinations in Washington, DC, but it doesn’t inspire investor confidence that Congress has ground to a halt as Republican infighting prevents the election of a new speaker.

WATCH THIS VIDEO: Navigating Treacherous Financial Waters

Rising yields pose a threat to momentum stocks (e.g. in the technology sector) as investors fret about the erosion of long-term cash flows for these companies. Higher rates mean future profits are worth less today. But rising rates lift other sectors.

Banks and insurance companies benefit because higher rates expand their profit margins. And because rising rates point to a strengthening economy, cyclical sectors such as consumer goods and industrials also benefit.

I’d be more worried about a steep stock market correction if other indicators also heralded trouble. But growth projections for the global economy and corporate profits remain on solid footing. Corporate earnings are especially encouraging.

The third-quarter earnings season got off to a bang last Friday, with the major banks reporting operating results that exceeded expectations on the top and bottom lines.

The consensus indicates that S&P 500 companies overall for the third quarter will have increased earnings by 1.3% year-on-year. That may seem like a modest growth rate, but it would represent a significant rebound after three quarters of flat or falling profits. The fourth quarter is projected to come in even better, for a year-over-year growth rate of 11%.

Fifty years of wealth-building…

Maybe the conditions I’ve just described are too uncertain for your taste. I wouldn’t blame you for being nervous. But I would blame you for leaving the stock market.

For market-thumping gains, with mitigated risk, I suggest you consider the advice of my colleague Jim Pearce, chief investment strategist of Personal Finance.

Personal Finance, founded in 1974, is our flagship publication and it has helped investors build wealth for nearly 50 years.

Case in point: If you had taken the initial recommendation of Personal Finance to buy Chevron (NYSE: CVX), and held on, you’d be sitting on a whopping return of nearly 3,200% (that’s not a typo).

Want to get aboard “The Next Chevron?” Click here for details.

John Persinos is the editorial director of Investing Daily.

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