After a hectic February, investors probably hope that March will be true to its proverb: Like a lion like a lamb.
Indeed, February proved to be a doozy, with benchmark bond yields represented by the 10-year treasury note TMUBMUSD10Y,
and the 30-year TMUBMUSD10Y bond,
recording the largest monthly surges in 2016, according to Dow Jones market data.
The move was a strong reminder to investors that bonds, considered commonplace and simple by some investors, can still wreak havoc on the market.
A recent trading rain, with sales of about $ 2.5 billion near the close on Friday, created a major decrease in the stock disadvantage in the last few minutes of the session and could imply that there could be more air pockets. before the market settles next week.
Dow Jones Industrial Average DJIA,
and S&P 500 index SPX,
barely held above the 50-day moving average, at 30,863.07 and 3,808.40, respectively, at the close on Friday.
“An associated sale of 10-20% in US shares would also concentrate the mind. But before that, the pain that is currently being handed over to growing stock portfolios could worsen. Citigroup strategies
“The commotion is probably not over,” Stephen Todd, an independent market analyst who leads the Todd Market Forecast, wrote in a daily note.
However, for all the bellyaching about yields running hotter than expected, stocks in February still managed to post solid yields. For the month, the Dow rose 3.2%, the S&P 500 rose 2.6% in February, while the Nasdaq achieved a return of 0.9%, despite a weekly loss of 4.9 % recorded on Friday, which marked the worst weekly skid in October .30.
Many have argued that a sale in Nasdaq Composite technology was inevitable, especially with buzzy stocks such as Tesla Inc. TSLA,
becoming more frothy only by some measures.
“But the market has been over-bought and expanded throughout the year and probably for several months at the end of 2020,” Jeff Hirsch, editor of the Stock Exchange Almanac, wrote in a note Thursday.
“After the big training period in the first half of February, people were looking for an excuse to make a profit,” he wrote, describing February as a weak link in what is usually the best six-month earnings period. for the stock market.
The beneficiaries of the recent yield move so far appear to be banks, which benefit from a steeper yield curve, as Treasury yields are long overdue, and the S&P 500 SP500.40 financial sector,
XLF,
decreased by 0.4%, which is, as it turns out, the second best weekly performance of the 11 sectors of the index behind the SP500.10 energy,
which increased by 4.3%.
Utilities SP500.55,
were the worst performers, down 5.1% from the week and the discretionary consumer SP500.25,
was the second worst, with 4.9%.
In February, energy increased by 21.5% as crude oil prices rose, while the financial sector rose by 11.4% that month, reserving the best and best monthly performance.
So what’s in store for March?
“Typical March trades come like a lion and come out like a powerful lamb in the first few days of trading, followed by hectic transactions until mid-month, when the market tends to return higher,” Hirsch writes.
Also, in March, there is a “triple witchcraft: it appears on the third Friday, when stock options, stock index futures contracts and stock index options contracts expire simultaneously.
Finally, seasonal trends suggest that March will be oscillating and could be used as an excuse for subsequent sales, but this recession may be cathartic and may lead to new gains in the spring.
“Further consolidation is likely in March, but we expect the market to find support soon and then challenge the latest highs again,” Hirsch writes, noting that April is statistically the best month of the year.
Scholar’s almanac
Looking beyond seasonal trends, it is uncertain how bond yields will increase and eventually evolve in the markets.
On Friday, the 10-year benchmark closed at a yield of 1.459% based on the 15:00 p.m. Eastern close and reached an intraday peak at 1.558%, according to FactSet data. The dividend yield for the S&P 500 companies in total 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 say yields will continue to rise, but the advance will be checked at some point by the Federal Reserve.
“The Fed is unlikely to let real US yields rise well above 0%, given the high levels of leverage in the public and private sectors,” analysts in the Citi global strategy team wrote in a note Friday. Rising Real Yields: What to do. ”
Adjusted real returns are usually associated with rates of inflation-protected securities, or TIPS, which compensate investors based on inflation expectations.
Actual yields have been negative, which has undoubtedly encouraged risk-taking, but the launch of the coronavirus vaccine with a food and drug administration group on Friday recommending approval for Johnson & Johnson’s JNJ,
the one-shot vaccine and the prospects of additional COVID aid from Congress increase the inflation outlook.
Citi notes that 10-year TIPS yields have fallen below minus 1% as the Fed’s quantitative easing last year was launched to help ease the stress on the financial markets created by the pandemic, but in recent weeks strategists note that TIPS they rose to minus 0.6%.
Read: Here’s what a hedge trader said in Thursday’s bond market crisis, which brought the 10-year Treasury yield to 1.60%
Citi speculates that the Fed may not step in to stop market turmoil until investors see more pain, with 10 years potentially hitting 2% before the alarm bells ring, bringing real yields closer of 0%.
“An associated sale of 10-20% in US shares would also concentrate the mind. But before that, the pain currently presented to growth-prone portfolios could become more severe, ”Citi analysts write.
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Analysts do not appear to be taking a bearish stance in themselves, but warn that a return to returns closer to the historical normal could be painful for investors heavily invested in rising stock names compared to assets, including energy and finance that are considered value investments.
Meanwhile, markets will seek more clarity on the health of the labor market next Friday, when non-farm payrolls data for February will be released. A big question about that key measure of US employment health, beyond how the market will react to good news in the face of rising yields, is the impact that colder-than-normal weather has. from February on the data.
In addition to job data, investors will follow this week’s February manufacturing reports from the Institute for Supply Management and construction spending on Monday. Data from the services sector for that month will be delivered on Wednesday, along with a private sector payroll report from Automatic Data Processing.
Read: The analyst claims that the current sale of the bond market is more serious than “tantic tantrum”
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