Traders on the floor of the New York Stock Exchange
Source: NYSE
Effects may fluctuate in the coming week. As yields go up, it can be difficult to get large technology and other growth stocks.
Rising bond yields have made growth stocks challenging. Names like Apple, Tesla and Amazon have lagged behind as investors move to cyclical groups doing well in an economic recovery. Nevertheless, the S&P 500 and the Dow closed at a record high on Friday, while the Nasdaq Composite was lower.
The Nasdaq, home of big technology, has risen 3% in the past week, but has fallen 5.5% in the past month.
The bond market in the coming week is likely to use the Federal Reserve, which meets on Tuesday and Wednesday.
The central bank is expected to give a nod to much better growth. Bond experts are also looking at whether Fed officials will adjust their interest rate outlook, which now does not include any interest rate hikes until 2023.
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“The markets have far too high expectations around what the Fed is going to do or say,” said Gregory Peters, head of multi-sector and strategy at PGIM Fixed Income. “I think the message is going to be consistent.”
He said Fed Chairman Jerome Powell is likely to sound a thousand and is unlikely to give any time frame on when the central bank will change its mortgage program or other policies.
Bond yields, which are moving against rate, have risen due to the better outlook for the economy.
Trading also appeared in the stock market, with the Dow rising 4% for the week to Friday to a record 32,778. Consumer discretionary stocks, which include retail, were among the top performers, with 5.7 %, reinforced by the optimism that individuals will spend their $ 1,400 stimulus checks.
Yields were higher Friday after President Joe Biden said all adults would be eligible for a vaccine by May 1. The 10-year treasury yield peaked at 1.642% – the highest level in more than a year.
This is the most important rate to look at as it affects mortgage lending and other consumer and business lending.
“The economy is going to be incredibly strong this year – deficit spending, reopening, vaccines,” said Peters of PGIM.
“It looks like all the numbers for next year are going to be revised higher,” he said. “This thing can therefore have sustainable growth, so I think there will be pressure on higher rates.”
Bond yields have risen sharply over the past month. The rapid pace of the move has caused equities to shake as investors adjust to higher rates. The treasury yield for ten years was 1.16% on 12 February.
Growth versus cyclics
Over the past month, energy stocks have risen by almost 20%, financial stocks by 10.2% and industry by 7%. The S&P technology sector has declined by 5.4% over the past month, and communications services, which include internet names, by 0.8%.
Higher rates are a challenge for technology and other growth stocks because the stocks are expensive and have a high price-to-earnings ratio.
“When rates are very low, valuations do not matter to people,” said Peter Boockvar, chief investment officer at Bleakley Global Advisors.
“If the rates are low, there is no penalty,” he said. “As rates start to rise, people become much more sensitive to valuations, and that’s what we’ve seen here.”
Scott Redler, a partner of T3live.com, follows technical techniques in the short-term stock market and trades many of the growth stocks. Lately, however, he has been sitting in many values and cycles.
“The names I’m in – Visa, GM, Ford, Macy’s, 3M. These were my biggest winners this week,” he said. “It was really hard to make money in Apple, Facebook and Tesla.”
The rise in interest rates hit the Nasdaq the hardest. Apple has fallen 0.3% in the past week, but up 10.6% in the past month. The S&P 500 set a record of 3,943 and rose 2.6% in the past week, but has been flat for the past month, by just 0.2%.
“Rate volatility could cause another turning point in technology,” Redler said. ‘Last week, technology reached its reactionary low, and it [past] week it had an oversold bounce. The question is, “Was that it?”
“Next Wednesday, Powell could be the determining factor,” he said. “Prices have reached higher points and technology is lower than last week, but perhaps the market is becoming more comfortable.”
Apple’s stall is unusual for the technology. This helped the market gain last year.
“Look at Apple, because it’s a bit of everything. Apple is growth, technology, retail. If anything is doing well, it has to be Apple,” Redler said.
Volatility in securities
There is some important data in the coming week, including retail sales and industrial production in February, both on Tuesday. There is also a 20-year auction of the $ 24 billion treasury bond on Tuesday.
The biggest catalyst for the bond market remains the Fed.
The bond market has speculated about something the Fed may not discuss after its meeting on Wednesday afternoon. In one of its efforts to bolster the economy during the pandemic, the Fed allowed banks to hold treasury bonds without adding it to the bank’s leverage ratio. With this strategy, institutions could have more flexibility to use their balance sheet for activities such as lending.
The program expires on March 31st.
‘This is a big problem, basically because you have so much treasury stock that will start again [the rule] it basically makes it very punitive for banks to own Treasurys, “said Peters of PGIM.
“The markets are divided over what is going to happen,” he said. “I think most experts believe that an extension is the right way. You have not heard anything from the Fed about this.”
Peters expects the treasury market to remain volatile.
“I think you are going to see more volatility in a high-pressure growth economy with extremely large deficits and an accommodating Fed,” he said. “I think you’re going to see these greedy moves.”
Week calendar in advance
Monday
08:30 Empire State Production
16:00 data from Treasury International Capital
Tuesday
Earnings: Volkswagen, Designer Brands, Jabil, Lennar, Coupa Software, CrowdStrike
Federal Open Markets Committee begins a two-day meeting
08:30 Retail Sales
08:30 Import prices
08:30 Enterprise of business leaders
09:15 Industrial production
10:00 Business Stocks
10:00 am National Association of Home Builders survey
Wednesday
Earnings: Cintas, Lands’ End, Five Below, Herman Miller, American Outdoor Brands
08:30 housing starts
14:00 Fed statement
14:30 Fed President Jerome Powell Information Session
Thursday
Earnings: FedEx, Dollar General, Nike, Petco, Accenture, Commercial Metals, Signet Jewelers
08:30 Initial claims
10:00 am Philadelphia Fed recording