Traders on the floor of the New York Stock Exchange
Source: NYSE
Bonds could be volatile next week. If yields increase, this could make it difficult to take stock of high-tech stocks and other types of growth.
Increasing bond yields has been a challenge to growth stocks. Names like Apple, Tesla and Amazon have been lagging behind as investors move into cyclical groups that have a good economic recovery. Still, the S&P 500 and Dow closed at record highs on Friday, while the Nasdaq Composite was lower.
The Nasdaq, home of high-tech, gained 3% last week, but fell 5.5% in the last month.
Next week’s bond market will likely take its cues from the Federal Reserve, which meets Tuesday and Wednesday.
The central bank is expected to make a gesture with much better growth. Bond professionals are also monitoring whether Fed officials will adjust their interest rate prospects, which now do not include rate hikes until 2023.
Feeded in advance
“Markets have too high expectations about what the Fed will do or say,” said Gregory Peters, head of multisectoral and strategy at PGIM Fixed Income. “I think the message will be consistent.”
He said Fed Chairman Jerome Powell is likely to look bad and not give time when the central bank will change its bond-buying program or other policy.
Bond yields, which move against the price, have been rising with a view to improving the economy.
This trade also appeared on the stock market, with the Dow up 4% the week ending Friday, with a record 32,778. Consumer discretionary stocks, which include retail, were among the best performers, up 5.7%, driven by optimism that individuals will spend their $ 1,400 stimulus checks.
Yields were highest on Friday after President Joe Biden said all adults would be eligible for a vaccine before May 1st. The 10-year Treasury yield peaked at 1.642%, its highest level in more than a year.
It is the key rate to consider as it affects mortgages and other consumer and business loans.
“The economy will be incredibly strong this year: spending deficit, reopening and vaccines,” Peters said of PGIM.
“It looks like for next year, all the numbers are being overhauled,” he said. “So this could have sustainable growth, so I think there will be pressure for rates to go up.”
Bond yields have risen sharply over the past month. The rapid pace of the move has made stocks nervous as investors adjust to higher rates. The 10-year Treasury yield stood at 1.16% on February 12th.
Growth Vs. cyclical
Over the last month, energy stocks have risen by about 20%, financial stocks have risen by 10.2% and industrial stocks have risen by 7%. The S&P technology sector fell 5.4% in the last month and communications services, which include Internet names, rose 0.8%.
Higher rates are a challenge for technology stocks and other growth stocks, as these stocks are expensive and have a high value for money.
“When rates are very low, valuations don’t matter to people,” said Peter Boockvar, chief investment officer at Bleakley Global Advisors.
“If rates are low, there is no penalty,” he said. “If rates start to go up, people become much more sensitive to valuations, and that’s what we’ve seen here.”
Scott Redler, a partner at T3live.com, follows short-term stock market techniques and trades many of the growth stocks. Lately, however, he has found himself sitting in many names of value and cycles.
“The names I’m on: Visa, GM, Ford, Macy’s, 3M. These have been my biggest winners this week,” he said. “It’s been really hard to make money on Apple, Facebook and Tesla.”
The Nasdaq has been hardest hit by rising interest rates. Apple fell 0.3% last week, but 10.6% last month. The S&P 500 ended a record 3,943 and rose 2.6% last week, but is flat over the past month, up 0.2%.
“Rate volatility could cause another turning point in technology,” Redler said. “Last week, technology reached its reactionary minimum, and that [past] the week had an oversold rebound. The question is, ‘Was that it?’ “
“Next Wednesday, Powell could be the determining factor,” he said. “Rates did highs and technology is a long way from last Friday’s lows, so maybe the market becomes more comfortable.”
Apple’s shutdown is unusual for technicians. It helped drive market gains last year.
“Look at Apple because it’s a little bit of everything. Apple is growth, technology and retail. If something goes right, it should be Apple,” Redler said.
Volatility of bonds
There are some important data next week, including February retail sales and industrial production, both Tuesdays. There is also a $ 24 billion 20-year Treasury bill auction on Tuesday.
The Fed’s main catalyst for the bond market remains.
The bond market has speculated on something the Fed might not discuss after Wednesday afternoon’s meeting. In one of its moves to bolster the economy during the pandemic, the Fed allowed banks to hold Treasury bonds without counting on the bank’s leverage ratio. This strategy allowed institutions to have more flexibility to use their balance sheet in activities such as lending.
The program expires on March 31st.
“This is a big problem basically because you have a lot of cash supply that will reinstate [the rule] basically, it makes it very punitive for banks to own treasures, ”Peters of PGIM said.
“Markets are a bit divided on what’s going to happen,” he said. “I think most experts believe an extension is the right way. You haven’t heard anything from the Fed on this issue.”
Peters expects the Treasury market to remain volatile.
“I think you’ll see more volatility in a high-pressure growth economy with extremely large deficits and an accommodating Fed,” he said. “I think you’ll see these whippy moves.”
Next week’s calendar
Monday
8:30 a.m. Empire State Manufacturing
4:00 pm International Treasury Capital Data
Tuesday
Earnings: Volkswagen, designer brands, Jabil, Lennar, Coupa Software, CrowdStrike
The Federal Open Markets Committee begins a two-day meeting
8:30 am Retail sales
8:30 am Import prices
8:30 am Survey of business leaders
9:15 h Industrial production
10:00 h Business inventories
10:00 h Survey of the National Association of Home Builders
Wednesday
Earnings: Tapes, Lands’ End, Five Below, Herman Miller, American Outdoor Brands
8:30 am Housing starts
14:00 Fed statement
2:30 pm Information Conference by Fed Chairman Jerome Powell
Thursday
Earnings: FedEx, General Dollar, Nike, Petco, Accenture, Commercial Metals, Stamp Jewelry
8:30 h Initial claims
10:00 a.m. Philadelphia Fed Survey