You often hear market commentators discuss that whenever the yield curve increases, stock prices would fall because a higher discount rate should lead to lower valuation. In 2021, you observed that the entire nominal yield curves shifted upwards i.e., nominal yields increased across all maturities. However, equity markets continued their runs to an all-time high. In contrast, in 2022, an upward shift in the nominal yield curve leads to a sharp decline in equity valuation.

A. Discuss the potential rational economic factors that can shift the nominal yield curves upward in both years. (5 marks)

B. Explain why there seems to be a disconnect between yields and equity valuation in 2021, but the opposite relationship appears in 2022. Hint: The explanation should link to the potential factors identified in Part A. (5 marks)