America’s Retirement Planners senior planner Ken Moraif in today’s markets and investing in technology.
History suggests that, despite the recent rise in yields, sales of technology stocks could continue to spill over to the broader market.
The Nasdaq Composite fell 7.25% on Tuesday from its record high on February 12, as a sharp rise in the 10-year yield forced investors to flee the growth-heavy index. At the same time, the Dow Jones Industrial Average held within 0.4% of its record high.
Investors took advantage of technology sales through shares of pilots such as Tesla Inc. and Apple Inc. for sale at many discounted prices. But David Rosenberg, chief economist and strategist at Rosenberg Research in Toronto, warns that the current environment looks a lot like what happened at the point of the dot-com bubble.
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In early 2000, the view, as it is today, ‘that equities were no longer interest rate sensitive and that the business cycle was revoked’, said David Rosenberg, chief economist and strategist at Rosenberg Research in Toronto.
Between mid-March and mid-April of that year, the Nasdaq composite fell 20% while the Dow remained its all-time high. By the end of 2000, the Nasdaq was cut in half while the Dow fell more than 9%.
Before the recession began in March 2001, the Nasdaq fell 66% and the Dow fell 15%.
“The lesson here is that it’s near or at the market’s highs that the Nasdaq is only succumbing to the overheated inflation fears and the rise in bond yields, and after the mega-paper declines, the Dow follows with a delay, said Rosenberg. “And the blue chips are dropping, albeit at a slower pace.”
The 10-year Treasury yield climbed 64 basis points this year to 1.56%, a 13-month high, amid the unprecedented amount of fiscal and monetary stimulus used to reverse the economic slowdown caused by COVID-19, to fight back inflation will be lacking since the 2008 financial crisis.
Traders will pay close attention to the 10-year period in the coming days, as President Biden’s $ 1.9 billion COVID-19 relief package is expected to pass through the House of Representatives on Wednesday and be signed by Sunday. The White House has already said it is working on a recovery package that could address infrastructure, climate change, inequality or other promises Biden has made on the campaign route.
According to history, there is “still no 10-year yield peak and a clumsy bias remains,” wrote Paul Ciana, technical strategist at Bank of America.
The last two major sell-offs in the bond market, in 2016 and 2012, resulted in the 10-year yield rising by 132 basis points and 162 basis points respectively. According to the lowest yield of 0.515% in August 2020, the highest yield in the range of 1.82% to 2.13% may occur and begin to form in May, according to the analysis of Bank of America. In both examples, the top took about three months to form.
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According to Deutsche Bank strategists, a ‘top-down approach’ indicates that the 10-year will reach 2% to 2.25%, but they say the level will be reached by the end of this year.
The firm says it will ultimately be the Federal Reserve that will determine whether the U.S. economy leaves its low inflation regime.
“Given the current Biden fiscal plans, the market is likely to price more than 50% probability on this side of the 2022 midterm elections,” Deutsche Bank strategists led by Francis Yared wrote.