Here are two things that are both true: A stronger economy is generally good for stocks, and a stronger economy means a higher return from the Treasury. Logic students do not have to go far in their studies to realize that a higher Treasury yield, therefore, is not necessary for stocks, and if they miss the class they no longer need to look at the markets. last week.
Last week, bond yields jumped and stocks fell. The problem was that yields jumped for reasons other than economic optimism, and stocks did not like it. Federal Reserve Chairman Jerome Powell used his conference testimony Tuesday and Wednesday to calm the market, but an unusual spike in Thursday’s yield nevertheless lifted stocks.
When yields rise as the economy recovers, it shouldn’t hurt stocks (Big Tech’s sheer size raises some doubts this time around, but leave that for later). Yes, higher yields reduce the value of companies ’long-term profits, but a stronger economy means more of those profits in the first place.
When yields rise because cashiers are sputtered according to Treasury ropes size, or when an upward movement takes over, or when investors fear a change in approach with the Fed, economic development is not balanced to help stocks.
What happened last week seems to be worrying that the Fed will be keeping its foot on the accelerator for too long – and that it will have to hit the economic brakes hard in the future in order to prevent inflation.
Earlier this month, eurodollar futures were priced for the Fed to raise rates from the current range of 0% -0.25% up to 1.5% -1.75% by 2025, and investors were okay with that. This month, the market has started price levels up another half-percentage point by then, even as rates are expected to remain unchanged for the next two years (as the Fed itself says).
Inflation expectations rooted in the Treasury market for the next five years have risen sharply this month, even as expectations for the next five years have fallen. It may be strange to worry about what will happen to inflation in several years’ time, as investors hope to even predict what will happen next year, but the general outlook is staggering. expressing concern that the Fed is taking it too lightly. It is true that the Fed can bring high inflation back under control more easily than it can push up low inflation. But if inflation becomes too high, it may have to hit the economy hard to bring prices back under control, and the combination of rising rates and a weaker economy is certainly bad for stocks.
We can be more granular about the impact on stocks than just talking about the overall market, because the divide between Big Tech and economically conscious cheap cycling companies is so dire – and because both parts of the market deals so differently with the output of the Treasury and the economy.
Big Tech and similar growth companies are not very aware of the state of the economy, but they are very sensitive to changes in bond yields. Cycling stocks are very sensitive to the state of the economy, but Treasurys have little influence on them. And in each case, they are both more aware than before.
We can measure this simply by comparing Nasdaq stocks, which tend to focus on growth, with the S&P 500, which includes many more old-line stocks. .
The link between Treasury yield increases and better performance is the strongest S&P since at least 1980, with daily changes in yields accounting for more than half of relative performance. Changes in output generally do not have a significant effect on relative performance.
We should see this as a good thing. Just as Big Tech and the Nasdaq did very well even when the economy declined, they should perform or even collapse completely as the economy recovers. This has just happened to the FANGs since the beginning of September. Facebook Inc., Inc.
Apple Inc.
and Netflix Inc.
– as well as Amazon.com Inc., Inc.
often added to the acronym – they are down since then, even as the jobs they were expected to renew. Alphabet Inc., Inc.
née Google, the fourth of the fourth, up.
The rounds offer growth closer to the term, and the acronym’s stock promise for long-term future growth is made so valuable by higher bond yields.
The market is wider, too. Up to September 1, the S&P 500 rose 9% even when more than half of its members fell, as stocks rose the most. Stocks that have hit the market over time have an average market value of $ 120 billion, and stocks that have hit the market since then – about two-thirds of the index, are again showing the expansion – a value less than half that.
There are two new dangers. First, bond yields could rise further, with no other strength in the economy to compensate. Second, market leadership may have shifted from bicycles to speculative stock, an unlikely combination of electric vehicles, clean energy, cannabis and bitcoin found by its nexus in Tesla Inc.
head of Elon Musk and Head of ARK Investment Cathie Wood. If too much speculation ends badly, the fall could hurt much of the rest of the market.
Write to James Mackintosh at [email protected]
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