There’s a school of thought that Goldman Sachs (NYSE: GS) rules the world. Regardless, the investment bank’s opinion carries a lot of clout.

Goldman Sachs set off alarm bells on Wall Street this week, when its economists warned in a note: “A sharp rise in long-term interest rates combined with widening deficits and heightened fiscal discord in Congress have renewed questions about the sustainability of rising government interest costs.”

The upshot, according to Goldman Sachs, will be fiscal tightening and an era of austerity.

Perhaps. The fiscal scolds are often proved wrong. However, it’s clear that stocks remain under pressure from 1) rising yields, and 2) political dysfunction in Congress.

Defensive sectors such as consumer staples have been performing better in recent days, whereas growth-oriented sectors such as technology have taken the worst beating.

WATCH THIS VIDEO: Assessing The Latest Risks to The Rally

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 interest rates on essentially risk-free bonds erode the premium investors can expect from riskier assets such as stocks, making it much less appealing to purchase shares.

However, although the past two months have been unpleasant for equities, in my mind this corrective phase doesn’t reflect a breakdown of fundamentals. The economy and corporate earnings are holding their own; the swoon lately in stocks mostly stems from investors getting less sanguine about the Federal Reserve’s intentions and worries about political machinations in the U.S. House.

The ouster on Tuesday of House Speaker Kevin McCarthy (R-CA) by a far-right faction in the GOP has sown chaos in Congress. This political headwind is likely to be temporary, but a leaderless House is unnerving Wall Street.

The main culprit for the recent equities slump, though, has been rising yields. The benchmark 10-year Treasury yield has shot past 4.80%, for the first time since 2007 (see chart):

The 10-year yield is far above its 50- and 200-day moving averages, denoting upward momentum. It’s also higher than its multi-year resistance level of 4.50%.

The release of the latest Job Openings and Labor Turnover Survey (JOLTS) by the Bureau of Labor Statistics on Tuesday showed a substantial increase in job openings, reflecting labor market resilience.

The JOLTS data has helped to drive bond yields higher, as worries grow that a robust labor market will prompt the Fed to maintain tight monetary policy for longer.

Amid the backdrop of elevated yields, the main U.S. stock market indices closed dramatically lower Tuesday.

On Wednesday, the indices bounced back as follows:

• DJIA: +0.4%
• S&P 500: +0.8%
• NASDAQ: +1.3%
• Russell 2000: +0.1%

Stocks got some relief from relaxing yields and declining oil prices. After a big run-up in crude, concerns are mounting again about demand destruction.

Rising bond yields particularly hurt interest rate sensitive investments, notably utility stocks. The benchmark Utilities Select Sector SPDR Fund (XLU) is down more than 18% year to date, compared to a gain of roughly 12% for the SPDR S&P 500 ETF (SPY).

Utilities must borrow large sums of money for capital expenditures. As rates go up, utilities’ rising cost of capital dampens their share prices. At the same time, safer interest-rate pegged investments such as U.S. Treasuries become more enticing from a risk-reward calculation.

But as always, you should avoid the herd mentality. The robust dividend yields churned out by high-quality utilities aren’t in danger when interest rates rise because their businesses are fundamentally strong.

Rising yields do 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.

Maintain a diversified portfolio and stick to the long-term investment strategy that you devised in calmer times.

However, if you’re still spooked by market uncertainty, consider the advice of my colleague, Jim Pearce.

Jim Pearce is the chief investment strategist of our flagship publication, Personal Finance. Jim has unearthed a once “secret” income power play that’s giving everyday investors the opportunity to collect huge payouts, regardless of Fed policy or the ups and downs of the markets. To claim your share, click here.

John Persinos is the editorial director of Investing Daily.

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