After a frantic February, investors will probably expect March to stay true to his proverb: Like a lion like a lamb.
In fact, February turned out to be bad, with benchmark bond yields, represented by the 10-year treasury note TMUBMUSD10Y,
and the 30-year bond TMUBMUSD10Y,
increasing its biggest monthly hikes since 2016, according to Dow Jones Market Data.
The decision greatly reminded investors that bonds, considered mundane and concrete by some investors, can wreak havoc on the market.
A recent wave of trading, about $ 2.5 billion in sales near Friday’s close, created a big downside for stocks in the final minutes of the session and may imply that there will be more airbags ahead. before the market settles next week.
The Dow Jones Industrial Average DJIA,
and S&P 500 SPX index,
they were barely above their 50-day moving averages, with 30,863.07 and 3,808.40, respectively, at the close on Friday.
“10-20% of associated sales in U.S. equities would also concentrate minds. Before, however, the pain that is currently spreading in growth-prone equities portfolios could worsen.” Citigroup strategists
“The turbulence is probably not over,” independent market analyst Stephen Todd, who directs Todd Market Forecast, wrote in a daily note.
Still, despite all the bewilderment on yields going hotter than expected, February stocks still managed to capture solid yields. During the month, the Dow was down 3.2%, the S&P 500 was up 2.6% in February, while the Nasdaq was down 0.9%, despite a weekly loss of 4.9%. % registered on Friday that marked the worst weekly displacement since October. .30.
Many have stated that it was inevitable that there would be sales on the Nasdaq Composite, a very heavy technology, especially with very strong stocks like Tesla Inc. TSLA,
it only gets scarier by a few measures.
“But the market has been over-bought and expanded year-round and probably for several months by the end of 2020,” Jeff Hirsch, editor of the stock market Almanac, wrote in a note dated Thursday.
“After the big period prior to the first fortnight of February, people were looking for an excuse to make a profit,” he wrote, describing February as the weak nexus of what is usually the best six-month earnings period for the stock market.
The beneficiaries of the recent evolution of yields so far appear to be banks, which benefit from a sharper yield curve as dated Treasury yields and the S&P 500 SP500.40 financial sector increase.
XLF,
finished 0.4%, which is arguably the second best weekly performance of the 11 sectors in the SP500.10 energy index.
which increased by 4.3%.
Utilities SP500.55,
were the worst performers, down 5.1% on the week and consumer SP500.25 discretionary,
it was the second worst, down 4.9%.
In February, energy rose 21.5% as crude oil prices rose, while finance rose 11.4% a month, reserving the best and second-best monthly performance.
So what’s in store for March?
“Typical March trades come in like a lion and come out like a lamb with strength during the first few days of trading, followed by abrupt trading until mid-month, when the market tends to rebound more,” Hirsch writes.
The month of March also sees a “triple witch: it occurs on the third Friday, when stock option contracts, stock index futures, and stock index option contracts expire simultaneously.
Ultimately, seasonal trends suggest that March will be hesitant and could be used as an excuse to sell more, but at this point, the fall may be cathartic and give way to new gains in the spring.
“It is likely to continue to consolidate in March, but we expect the market to find support soon and then be able to challenge recent highs again,” Hirsch writes, noting that April is statistically the best month of the year.
Stock Exchange Almanac
Looking beyond seasonal trends, it is uncertain how bond yields will increase and eventually shrink in markets.
On Friday, the benchmark ten-year note closed with a yield of 1.459% based on the 3 p.m. east close and hit an intraday peak with 1.558%, according to FactSet data. The dividend yield of the S&P 500 companies as a whole was 1.5%, by comparison, while the Dow is 2% and for the Nasdaq Composite it is 0.7%.
As for the extent to which rising yields will pose a problem for equities, Citigroup strategists argue that yields are likely to continue to rise, but the advance will be verified by the Federal Reserve at some point.
“The Fed is unlikely to let real U.S. yields rise well above 0%, given the high levels of public and private sector leverage,” analysts at Citi’s global strategy team wrote in a Friday’s note titled “Rising Real Yields: What to Do”.
Adjusted actual returns are usually associated with rates of Treasury inflation-protected securities, or TIPS, that compensate investors based on inflation expectations.
Actual returns have been negative, which has certainly been encouraging to take risks, but the deployment of the coronavirus vaccine on Friday with a Food and Drug Administration group recommending the approval of Johnson & JNJ Johnson,
the one-jab vaccine and the prospects for new COVID aid from Congress increase inflation prospects.
Citi notes 10-year TIPS yields fell below 1% as the Fed began quantitative easing last year to help ease tensions in the financial markets created by the pandemic , but in recent weeks strategists noted that TIPs had risen to minus 0.6%.
Read: This is what a hedge fund trader said that happened in the bond market rage on Thursday, which brought the 10-year Treasury yield to 1.60%
Citi speculates that the Fed may not intervene to curb market disruptions until investors see more pain, with 10 years potentially hitting 2% before the alarms go off, bringing real yields closer to 0%.
“A 10-20% associate sell-off on U.S. equities would also center minds. But before that, the pain that is currently spreading in growth-prone equity portfolios could worsen,” Citi analysts write.
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Analysts do not appear to be taking a bearish stance per se, but warn that a return to returns closer to historical normalcy could be painful for investors investing heavily in growth names compared to assets, including energy and finance, which are consider value investments.
Meanwhile, markets will look for more clarity on the health of the labor market this coming Friday when non-farm payroll data for February is released. A big question about this key indicator of US employment health, beyond how the market will react to the good news in the face of rising yields, is the impact that the colder-than-normal February weather has. about the data.
In addition to job data, investors will observe this week’s February manufacturing reports from the Institute of Supply Management and construction spending on Monday. Data from the services sector for the month are due to be presented on Wednesday, along with a payroll report from the private sector for Automatic Data Processing.
Read: The current bond market sale is worse than the “taper rage” in a key way, the analyst argues
Also read: 3 reasons why rising bond yields are gaining strength and shaking the stock market