Bloomberg
Gender bulls point to rising rates for ‘real reasons’
(Bloomberg) – While Tesla Inc. a further sales in momentum darlings amid rising yields, some investors fear it means the bull market is in trouble in 11 months. The rise in yields over the past week has certainly overwhelmed the nerves. assets. On the edge of the stock market, where signs of excess have become apparent, investors are being warned. Tesla fell more than 10% from 10 a.m. in New York after falling 8.6% Monday. Bitcoin has tumbled by as much as 18%, but in a broader sense, rates remain relatively low. Compared to measures of earnings returns, equities still offer a premium almost four times greater than the historical average. If anything, earnings could explode as economists up and down Wall Street raise their economic growth forecasts to heights not seen in decades. This will justify stock valuations that seem stretched by some traditional standards. The case of bulls for stocks in a period of rising rates is that the sale of bonds is caused by signals emanating from commodity markets and economic data such as retail sales. The Biden government intends to adopt a massive spending bill and Federal Reserve Chairman Jerome Powell, who testified before Congress on Tuesday, is committed to keeping short-term rates near zero. “If we look at the landscape today, the rates are rising for the right reasons,” said Peter Mallouk, CEO of Creative Planning. Although some believe the market should decline because it is trading at the top of valuations, he said: “the reality is that it can stay high while earnings grow in it.” The stocks that are under the most pressure this week own the air. high valuations that become more difficult to justify as treasury yields rise. And a valuation methodology sometimes called the Fed model, which compares corporate profits to mortgage rates, has started to move against bulls. At present, the earnings yield of the S&P 500 – how much profit you get in terms of share prices – is about 1.79 percentage points above the return on 10-year treasury, the smallest benefit since September 2018. But any warning that comes out the criterion flickers is dull. The current premium is still well above the average of 48 basis points in Bloomberg data from 1962. This means, even if it is equal, that equities can still be attractive relative to history if ten-year returns remain below 2.67% . The yields recently amounted to almost 1.36%. In a note published earlier this month, Goldman Sachs Group Inc. strategists, including Ryan Hammond and David Kostin, said equities can usually digest gradual rate hikes, especially if driven by growth rather than Fed policy. What tends to cause unrest in equities are sharp rises. Stocks usually fall on average in a given month when rates rise by two or more standard deviations, which in today’s terms is 36 basis points. Yields rose 30 basis points this month, reaching a 12-month high. Katie Nixon, chief investment officer of Northern Trust Wealth Management, agrees. “While interest rates may have risen under the wind of upward changes in both growth and inflation, both of these variables tend to be positive for equities as well – to some extent,” Nixon said. “It is only when rates rise in a disorderly manner that risk-taking markets react negatively.” Anyone who is nervous that stocks have exceeded the basics can comfort him in the latest returns. In August, when the S&P 500 fully recovered from losses during the 2020 bear market, the ten-year returns sent an ominous signal with a drop in the lowest record. In a way, the capture of returns indicates that the bond market is finally endorsing the positive economic message that equities have been flickering since March last year. Another way to look at it: equities look extremely stretched based on reported earnings from the past. 12 months which included the recession of the pandemic. On the benchmark, the S&P 500’s price earnings multiple was at 32, which obscured the peak level seen during the dot-com period. The value issue becomes a little more encouraging when measured against the year’s earnings. As analysts expect earnings to rise 23% to $ 171 per share, the P / E ratio is down to 23. If companies with large margins continue to beat the estimates, the picture would be even better. Earnings in the fourth quarter were 16% higher than expected, a rate of positive surprises that earnings from 2021 to $ 208 per share if sustained. That would yield a multiple of 20. “What looks like very high US stock valuations is defensible if (and only if) earnings fall sharply in the second half of the year,” wrote Nicholas Colas, co-founder of DataTrek Research. in a recent note. “There are certainly micro-bubbles (some SPACs, IPOs), but there is also a good case that stocks as a whole can and will earn in high valuations.” This is not to say that returns currently do not matter for equities. Money moved quickly from highly valued stocks like Tesla, with the Nasdaq 100 falling for a sixth day, the longest loss since August 2019. At the same time, companies benefiting from an economic recovery outperformed profits. ‘do not position in areas like finance and energy that are really the benefits of things like rising yields, rising commodity prices. “I think there’s been a bit of a scramble,” Lori Calvasina, head of RBC Capital Markets’ US equities strategy, told Bloomberg Television. “It’s more a story of repositioning in US equities, rather than getting out of US equities.” (Updates with Tuesday’s prices in the second and penultimate paragraph) Visit us at bloomberg.com for more articles like this. Sign up now to stay ahead with the most trusted business news source. © 2021 Bloomberg LP