Growth, technological stocks falling out of favor?

Equities fundamental forecast: slightly brisk

• Growth stocks, the Nasdaq 100 and Taiwan’s index fell last week
• Rising long-term treasury yields lead to portfolio allocation
• Value stocks may hold because Fed looks bad on bond market

Value stocks that get a voice as growth grows

At first glance, the past week has been quite sad for global stock markets. A closer examination, however, revealed that it was more similar to the forces causing the shift of portfolio allocations and a revolution out of growth and into value stocks. On Wall Street, the Dow Jones Industrial Average has climbed about 1.75 percent over the past 5 trading days. The S&P 500 rose by about 0.75. But the technological Nasdaq 100 fell by more than 2%.

To illustrate this further, look at Taiwanese stocks. The Taiwan index has been strong in the Asia-Pacific region since the Covid low last year, rising by about 90% to the previous month. About 62% of the index’s weight is concentrated in technology. The country mainly exports integrated circuits. The Taiwan index was also one of the worst performers in the APAC region last week, down 3.63%

Rising treasury yields in the world’s largest economy are likely to have fueled this dynamic. The ten-year rate is now more than 200% higher than last year’s low, which at one point reached 1.62% last week. It also meant that the government bond exceeded the annual dividend yield of the S&P 500 – see chart below. This is slowly making it more expensive to forgo equities for equities, leading to shifting portfolio allocations.

Comments from central bank officials last week apparently indicated that higher rates are not yet a cause for concern in the longer term. Treasury returns after Fed Chairman Jerome Powell spoke last week. Luis de Guindos, vice-president of the ECB, said the central bank was not in control of the yield curve. Although, the Governor of the Bank of Japan, Haruhiko Kuroda, has emphasized the importance of keeping long-term rates stable.

10-year Treasury return against S&P 500 Dividend return

With that in mind, growth stocks seem to be the most vulnerable amid rising long-term Treasury yields. Economic recovery expectations and increasing U.S. fiscal stimulus heap help drive reflational trade. Yet the loss of monetary policy is here to stay, with interest rates from the front being deprived of many returns. It remains a prominent and unmistakably strong force for equities in general.

As such, stocks in information technology and stocks with supposedly high valuations – such as Tesla and Nvidia – remain the biggest risk for volatility in the short term. However, the broader market may still remain intact. This is as U.S. vaccinations begin with Johnson & Johnson’s single-vaccine vaccine. All eyes are also on the Bank of Canada and the European Central Bank to see what they see this week on long-term rates.

Look at the DailyFX Economic Calendar for more important events!

Wall Street Index vs. Long-Term Treasury Average

Chart created in TradingView

— Written by Daniel Dubrovsky, Strategy for DailyFX.com

To contact Daniel, use the comments below or @ddubrovskyFX on Twitter