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The faster pace of bond yields sends a warning about the stock market – especially the rising stocks.
The 10-year benchmark treasury increased by about 20 basis points since the beginning of the year – 1 basis point equals 0.01% – and was 1.13% on Monday. Still relatively low, the yield is the highest since March, but the yield itself is not a problem.
The move could signal a period of more volatility for the stock market and the potential for greater pressure on FANG and other growth names that contributed to the growth of the stock market last year. Some strategists expect those Big Tech and growth stocks to slow their gains this year, as cyclical values and names grow further with the prospect that vaccinations will lead to an improved economy.
Strategies do not see returns at current levels stopping stock market earnings, but waiting for rates to rise further could make the race harder for equity investors.
“I think the path of the least resilient … is still up … The technicians who support this market are strong, but if you’re looking for warning signs, there are a few warning signs coming out of the fixed income market,” he said. Mohamed El-Erian, chief economic adviser at Allianz.
El-Erian, in a CNBC interview, said yields rose on longer-term bonds, such as 10-year and 30-year bonds, but the 2-year yield remained low, anchored by the rate policy. the Fed’s zero interest rate. . The 10-year course is widely viewed as it influences mortgages and other types of lending.
“It is growing for the wrong reason, not because of growth, but because of a combination of shoppers who are hesitant and people worried about inflation, not reflection,” El-Erian said. “So if this continues, if you get another 20 basis points in another five or six trading sessions, then the yellow glows much brighter at that point.”
The 10-year yield exceeded the psychological level of 1% last week after Democrats won two seats in Georgia’s Senate, giving Democrats control of the Senate. This has led to more bond sales, as investors have speculated that President-elect Joe Biden will now be able to promote his trillion-spending plans. More stimulus means more debt and more treasury issues to pay them off, a recipe for higher returns. Yields are against the price.
“In the last few weeks, we have made the leap to rate growth being neutral, to rate growth being positive, to this day, where you can argue that the rates moving above here are probably a headwind for stocks, especially high growth, P Shares / E, “said Julian Emanuel, head of BTIG’s strategy for equities and financial instruments. Emanuel notes that investors have already begun the transition from high value growth in the past few months.
Emanuel expects the S&P 500 to reach 4,000 by the end of the year, but he also believes the market is entering a new phase of speculation, with both upward and downward volatility.
He said the evidence for the speculative phase is evident in how the stock market continued to advance, as the decade quickly passed over 1%. He also pointed out that stocks were not shaken too much last week, when a violent crowd took control of the US Capitol during a congressional session. Stocks also continued to rise as Covid cases rose and deaths reached a new record daily high. The market also ignored a very weak occupancy ratio on Friday.
“We are in the more speculative phase of the rally. The price action confirms that we are in the more speculative phase of the rally. It does not mean that you will make an imminent top, but you should be ready for more volatility. We feel comfortable with 4,000, but it is possible to see a series of corrections with 10% more on the way to get there “, said Emanuel.
Strategists say it is even more important for corporate revenues to be strong in an environment with rising returns. Strategies at Goldman Sachs and Morgan Stanley warned on Monday that higher interest rates could cover market gains.
“Higher rates are the wild card and could start a period of declining equity valuations, making the earnings review even more important than usual for stock performance,” wrote strategists Morgan Stanley.
Goldman strategists said more fiscal stimulus should lead to higher gains in 2021, but rising rates could limit growth for multiple stocks. The price-earnings ratio is multiple, and many growth stocks are at very high levels. Amazon, for example, has a P / E of 91. Amazon fell 1.8% month-on-month, while other FANG members – Alphabet, Facebook and Netflix – were also lower.
“You’ll get more volatility up and down,” Emanuel said. “It is possible to get a new marginal maximum here in the next few days, but in general what you will see is that the market becomes more selective, the higher you go and this increases the chances that you will get a much more complete, comprehensive correction. driven by large stocks of multiple growth. “
Dan Suzuki, deputy CIO at Richard Bernstein Advisors, said the type of stocks that should work best are cyclical or stock names, the same types of stocks that are more isolated from rising rates.
“Basically, by definition, a high P / E stock also incorporates a lot of growth. If you want to put it in terms of valuation, much of the value of the stock is far into the future. This value is far in the future is more sensitive to interest rates. The higher these rates, the lower the future value, “he said.