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NYSE
The rapid upward movement in bond yields is sending a warning about the stock market, especially growth stocks.
The ten-year benchmark Treasury has risen about 20 basis points since the beginning of the year (one basis point equals 0.01%) and stood at 1.13% on Monday. Still relatively low, performance is the highest it has been since last March, but performance is not an issue in itself.
The move could be pointing to a period of more volatility for the stock market and the potential for more pressure on FANG and the other growth names that helped boost the stock market last year. Some strategists expect Big Tech stocks and growth to curb their gains this year as value and cyclical names increase with the possibility of vaccinations leading to an improved economy.
Strategists do not see yields at current levels halting stock market gains, but the expectation that rates will continue to rise could make investing in stocks more bumpy.
“I think the path of least resistance … still continues … The technicians who support this market are strong, but if you look for warning signs, there will be some warning signs that will come out of the fixed income market “. Said Mohamed El-Erian, chief economic adviser to Allianz.
El-Erian, in a CNBC interview, said yields have risen on longer-term bonds, such as ten-year and 30-year bonds, but 2-year yields have remained low, anchored in the Fed’s zero interest rate policy. Ten years is highly regarded as they influence mortgages and other types of loans.
“It’s going for the wrong reason, not because of growth, but because of a combination of hesitant buyers and people worrying about inflation, not reflation,” El-Erian said. “So if that goes on, if you get 20 basis points in five or six trading sessions, then yellow will blink a lot more at that point.”
The ten-year performance topped the psychological level of 1% last week after Democrats won two seats in the Georgia Senate, giving Democrats control of the Senate. This led to more bond sales, as investors speculated that President-elect Joe Biden will now be able to push through his trillion-spending plans. More stimulus means more debt and more Treasury issues to pay it off, a recipe for higher returns. Yields move against price.
“In recent weeks, we have made the jump to the rate hike neutral, to the positive rate hike, to the present day, where it can be argued that rates rising from here are likely to be a headwind for equities, especially high growth, a high P / E equities, ”said Julian Emanuel, head of equity and derivatives strategy at BTIG. Emanuel notes that investors have already begun to move from high-value growth in recent months.
Emanuel expects the S&P 500 to reach 4,000 by the end of the year, but he also sees the market enter a new phase of speculation, with both upward and downward volatility.
He said the evidence of the speculative phase is evident in the way the stock market continued its advance, as the ten years were quickly above 1%. He also noted the fact that last week the actions did not explode much when a violent crowd took control of the U.S. Capitol during a session of Congress. Stocks also continued to rise as Covid cases increased and deaths reached a new daily level. The market also ignored a very weak employment report on Friday.
“We are in the most speculative phase of the rally. The price action confirms that we are in the most speculative phase of the rally. It does not mean that you are going to make a top, but you should be prepared for more volatility. We are comfortable with 4,000, but you may see a series of 10% more corrections along the way to get there, ”Emanuel said.
Strategists say it’s even more important for corporate profits to be strong in an environment of growing returns. Goldman Sachs and Morgan Stanley strategists warned Monday that higher interest rates could cover market gains.
“The wildcard is that higher rates may begin a period of falling stock valuations, making earnings revisions even more important than usual for stock performance,” the Morgan Stanley strategists.
Goldman strategists said higher fiscal stimulus should lead to higher gains by 2021, but rising rates could limit the rise in stock stocks. The multiple is the price-benefit ratio, and many growth stocks are at very high levels. Amazon, for example, has a P / E of 91. Amazon fell 1.8% on Monday, while other FANG members (Alphabet, Facebook and Netflix) were also lower.
“You’ll get more volatility up and down,” Emanuel said. “You can get a new marginal high here in the next few days, but overall what you’ll see is that the market is more selective, the higher you go up and that increases the chances of you getting a more complete and complete correction, led by highs. multiple growth stocks. “
Dan Suzuki, CEO of Richard Bernstein Advisors, said the types of stocks that should do better are cyclical or value names, the same types of stocks that are most isolated from rising rates.
“Basically, by definition, a high stock of P / E also incorporates a lot of growth. If you want to put it in terms of valuation, much of the value of the shares is far from the future. This value is very The future is more sensitive at interest rates. The higher these rates are, the more you will discount the future value, “he said.