The eye of the broken market bears fruit to determine the path of treasury stocks

ছবি Photo from Reuters file: Front of the New York Stock Exchange (NYSE) in New York, USA, February 16, 2021. Reuters / Brendon McDermide / File photo

By Louis Krauskoff

NEW YORK (Reuters) – Investors are turning to treasury yields as a key factor in determining how stocks will fare for the rest of the year, a month after equities suffered their biggest losses since the start of the coronavirus epidemic.

It posted the biggest monthly fall since September 2020 in September, when it fell 5% from its all-time high for the first time this year.

Production in the U.S. Treasury has shaken stocks, reached three-month highs, a fierce battle over U.S. debt limits, raised concerns in an already volatile market, the fate of massive infrastructure spending bills and the collapse of China’s heavily indebted Evergrand Group. The S&P 500 is still up 16% this year.

“Investors are looking for a catalyst … and the catalyst they are currently focusing on is the direction of interest rates,” said Sam Stoval, chief investment strategist at CFRA.

Yields, which are moving in the opposite direction of bond prices, are historically recovering from lows and their recent rise is widely seen as a sign of economic strength.

Their rally follows the Federal Reserve’s hockey trend at its monetary policy meeting last week. The central bank said it could reduce its 120 120 billion-a-month government bond-buying program as early as November and start raising it at potential rates next year, which some had expected.

Yet yields increase, such as moving 27 basis points logged by the 10-year benchmark note after the Fed meeting, could reduce the greed of stocks. The 10-year yield was close to 1.47%, bringing back profits over the weekend.

Stocks and bonds could take a hint from next week’s developments in Washington, where lawmakers are continuing to debate the infrastructure spending package, as well as next Friday’s U.S. jobs report.

Expansion between two-year and 10-year treasury yields are among the indicators that investors are using to determine the future direction of stocks. Some see it as a barometer of economic slowdown or overheating.

According to Ed Cleisold, chief U.S. strategist at Ned Davis Research, zero is a “sweet spot” for stocks that spread from zero to 150 basis points, consistent with the S&P 500’s 11% annual return based on historical data. . According to CFRA Stoval, the S&P 500 has gained an annual average of 9.1% since 1945.

That spread has widened recently and stands at around 120 basis points on Friday. When spreads exceed 150 basis points, “that’s when stocks start to struggle,” Kleisold said, historically equivalent to an annual S&P 500 return of 6%.

“A curve too much means that inflation is spiraling out of control and the Fed may have to tighten quickly,” Cleisold said in a report this week.

The pace at which yields increase is also important, as are the backgrounds of economic and monetary policy, say analysts at Goldman Sachs (NYSE :).

In a recent report, the bank contrasted recent production growth with an increase of 50 basis points earlier this year.

Although the previous upswing reflected a bullish economic outlook, now that “economic growth is slowing, the (Fed) is expected to announce a slowdown at its November meeting, and our economists have downgraded China’s economic growth forecast,” the bank’s analysts wrote.

High yield pressure stock valuation is a common way to evaluate equity by increasing the rate at which cash flows are discounted in the future. Such pressures are particularly intense for tech and other growth stocks whose valuations rely heavily on future gains.

The S&P 500 technology index has declined 2% since last week’s Fed meeting, compared to the 0.9% decline in the overall index. Weaknesses in the technology sector, which weighs 27% of the weight of the S&P 500 and other technology-related stocks, could cause problems for the broader index, even as production increases benefit economically sensitive stocks such as banks.

Many investors still see stocks as more attractive than bonds, despite yields rising. According to Keith Larner, co-chief investment officer at Truist Advisory Services, the equity risk premium, which compares the earnings of a stock to the yield on a 10-year Treasury bond, is currently in favor of equity.

When the premium historically reached that level near Wednesday, the S&P 500 lost a one-year return on 10-year Treasury notes averaging 10.2%, Larner said.

“Yield growth at one stage is healthy for the equity market,” said Matt Perron, director of research at Janus Henderson Investors.

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