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Beaten bulls point to rates rising for ‘the right reasons’

(Bloomberg) – With Tesla Inc. leading another selloff in beloved drivers amid rising bond yields, some investors fear this means the 11-month bull market is in trouble. The rally in yields last week has certainly shaken nerves around the world. assets. On the periphery of the stock market, where signs of glut have become apparent, investors are bailing out. Tesla fell more than 10% at 10 a.m. in New York after a drop of 8.6% on Monday. Bitcoin fell as much as 18%. However, viewed more broadly, the rates remain relatively low. Compared to earnings performance measures, stocks still offer a premium nearly four times the historical average. If anything, earnings are likely to skyrocket as Wall Street economists raise their economic growth forecasts to levels never seen before in decades. That would justify stock valuations that appear stretched by some traditional measures. The bulls’ argument for stocks in a period of rising rates is that the bond sell-off is caused by signals emanating from the commodity markets and economic data such as retail sales. The Biden administration is poised to pass a massive spending bill, and Federal Reserve Chairman Jerome Powell, who is testifying before Congress Tuesday, is committed to keeping short-term rates near zero. “When we look at the current landscape, rates are going up for the right reasons,” said Peter Mallouk, CEO of Creative Planning. While some think the market has to go down as it is trading at the higher end of valuations, he said, “the reality is that it can stay high as earnings grow.” Stocks under increased pressure this week have sky-high valuations that become harder to justify as Treasury yields rise. And a valuation methodology sometimes called the Fed model that compares corporate earnings to bond rates has begun to move against the bulls. Right now, the S&P 500 earnings yield, the amount of earnings you make relative to stock prices, is about 1.79 percentage points above the 10-year Treasury yield, the advantage smallest since September 2018, but any warning that shines from that metric is dark. The current premium is still well above the 48 basis point average in Bloomberg data dating back to 1962. That means, all things being equal, stocks can still be framed as attractive relative to history when returns to 10 years remain below 2.67%. Yields were recently around 1.36%. In a note published earlier this month, strategists at Goldman Sachs Group Inc., including Ryan Hammond and David Kostin, said stocks are often able to digest gradual increases in interest rates, especially when driven by the growth rather than Fed policy. What tends to cause turmoil in stocks are sharp increases. Stocks typically fall on average in a given month when rates rise by two or more standard deviations, which is 36 basis points in current terms. Yields are up 30 basis points this month, reaching a 12-month high. Katie Nixon, chief investment officer at Northern Trust Wealth Management, agrees. “While interest rates may have risen under the tailwind of upward revisions to both growth and inflation, both variables tend to be positive for equities as well, to some extent,” Nixon said. “Only when rates rise in a disorderly way do risk asset markets react negatively.” However, anyone nervous that stocks were ahead of fundamentals can take comfort in the latest spike in yields. In August, when the S&P 500 fully recovered from losses during the 2020 bear market, 10-year yields sent an ominous signal with a dip to record lows. In a way, the recovery in yields indicates that the bond market is finally backing up the bullish economic message that stocks have been flashing since last March. Another way of looking at it: Stocks look extremely stretched based on past reported earnings. 12 months that included the pandemic recession. On that metric, the S&P 500’s price-earnings multiple stood at 32, eclipsing the high level seen during the dot-com era. The case for value gets a bit more encouraging when compared to this year’s earnings. As analysts expect earnings to rise 23% to $ 171 a share, the P / E ratio drops to 23.If companies continue to beat estimates by a large margin, the outlook would improve even more. Fourth-quarter earnings were 16% higher than expected, a pace of positive surprises that, if sustained, would push 2021 earnings to $ 198 per share. That would result in a multiple of 20. “What appears to be very high US equity valuations is defensible if (and only if) earnings rebound strongly in the second half of the year,” wrote Nicholas Colas, co-founder of DataTrek Research. . in a recent note. “There are certainly microbubbles (some SPACs, IPOs), but there is also a good case that stocks as a whole can and will work their way to elevated valuations.” That’s not to say that returns don’t matter for stocks right now. Money moved quickly out of high-value stocks like Tesla, with the Nasdaq 100 falling for the sixth day, the longest losing streak since August 2019. At the same time, companies that benefited from an economic recovery outperformed better. . They are not positioning themselves in areas like finance and energy that are really the beneficiaries of things like rising yields and rising commodity prices. I think there is a bit of confusion, ”said Lori Calvasina, head of US equities strategy at RBC Capital Markets, in an interview on Bloomberg Television. “It’s more of a story of repositioning within US stocks, rather than exiting US stocks.” (Tuesday’s price updates in the second and penultimate paragraphs) For more articles like this, visit us at bloomberg.com. forward to the most trusted business news source. © 2021 Bloomberg LP

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